Pricing power refers to a company’s ability to raise prices without losing a significant amount of sales. It indicates the extent to which a firm can influence market prices.
- Determined by demand elasticity – customers’ sensitivity to price changes
- Granted by factors like brand strength, product ubiquity, lack of substitutes
- Entails evaluating output impact of potential price increases
Companies with strong pricing power face more inelastic demand, giving leeway to periodically lift prices without severely hurting revenues.
Industries granting high power include utilities, pharmaceuticals, tech hardware with switching costs. Low power sectors are commoditized with purchasers highly sensitive to price.
Monitoring competitors and costs ensures pricing power isn’t overextended. However, it represents a sign of market dominance when wielded judiciously for mutual benefit of producers and consumers.
Overall, balancing revenue growth and customer retention requires nuanced exercise of any available pricing influence over the long term.
Here are some industries that typically have high pricing power:
- Pharmaceuticals – Brand name drugs often have few substitutes, giving companies leverage to raise prices. Demand is inelastic as healthcare is prioritized.
- Luxury goods – Firms like Louis Vuitton and Gucci have very strong brands that allow them to charge premium prices. Customers are less sensitive to price for status luxury items.
- Software/Technology – Companies like Microsoft, Adobe, and Autodesk provide specialized software/tools that businesses rely on. It’s difficult for customers to switch due to high switching costs.
- Utilities – Essential services like electricity, water, and gas are supplied by regional monopolies or oligopolies. Demand is non-discretionary so consumers have little choice but to pay higher rates.
- Telecom/Internet – In many areas, only one or two providers of cable, internet, cell service exist. This limits options for customers if prices increase.
- Consumer packaged goods – Large brands like Coca-Cola, P&G, and Unilever have pricing clout due to iconic household name recognition and marketing scale.
- Airline industry on popular routes – Few competitors means more ability to periodically raise ticket costs for inelastic business/frequent traveler demand.