Pricing Power

Pricing power refers to the power of an entity to choose the desired price for its product or service without the risk of losing its demand or customer base. Generally, it is an attribute of companies that are market leaders or monopolies.

In simple terms, it is the power to set high prices. When such companies have or escalate to higher prices, consumers do not care to find alternatives; they continue using the high-priced products or services minimum for a short term. It reflects the scenarios like consumers affected by monopolies.

• Pricing power refers to the power of an entity to increase the price of its products and service offerings without losing business.
• Entities like market leaders and monopolies enjoy it, and it decreases with an increase in the number of competitors.
• Well-known types are monopolies, luxury products and services, differentiated products, commodities, and niche products. 
• During demand-pull inflation, companies with pricing power can increase the price without considering many factors, increasing profit margin.

Pricing power, in general, refers to the power of a company in the market. It is high if the price hike of a product or service does not significantly impact its market demand and sales, and it is low if the price hike results in a decrease in market demand and sales. It depends on many factors, including product uniqueness, goodwill, and the product's market system. Furthermore, generally, it decreases with an increase in competitors.

The power to change prices benefits companies, specifically when there is a rise in demand or demand-pull inflation phase. During that period, companies can increase their products' prices leading to a higher profit margin. Increasing profit margin implies a slowly moving production cost. However, if increased production costs cause inflation, companies may find it difficult to increase the price abruptly. Altogether, it is an indicator in evaluating a company since companies possessing it can thrive in difficult scenarios and vice versa.

Well-known types are monopolies, luxury products and services, differentiated products, commodities, and niche products.

Monopoly

Monopolies are dominant or sole players in a market with zero competition. They do not have to care about the competition while deciding the price, and consumers have no other alternative but to accept the price set by the seller or the producer. Monopolies result in higher pricing and lesser output than completely competitive businesses. Hence, the absolute market authority directs them to set a price above the firm's marginal cost. Some of the common monopoly markets are natural gas, electricity, and telecommunication.

Luxury Products and Services

The luxury industry is known for its high prices. Consumers willingly pay high prices for unique, expensive, and exclusive luxury products and services, and they enjoy obtaining them. As a result, consumers' income and demand for luxury products and services are positively correlated. Prestige or premium pricing strategy creating a superior or elite image is more common with luxury products and services. Moreover, they pay little or no attention to the price of other substitutes.

Differentiated Products

Differentiated products share strong goodwill in the eyes of consumers. It is because they are superior to other alternatives and competitor products present in the market, specifically in the eyes of consumers who give preference to the differentiating factors. Moreover, the producers of differentiated products can price them high because consumers will pay for factors like quality, durability, and visual aesthetics. Therefore, new entries in the market cannot immediately affect the growth of such companies, and they steadily expand their market share as well.

Commodities

A commodity falls in the product range consumed and bought by people regularly; they are part of their lives and undifferentiated. Companies in this section have low pricing power. Consequently, companies follow the set market prices and focus on developing customer loyalty.

Niche Products

Niche price exhibits a price inelasticity of demand because they focus on a specific section of a large market by selling products or services satisfying specialist demand. In such sections, competition is relatively low due to the uniqueness of the offerings. Examples are vegan-friendly apparel and organic pet foods.

Sarah lives in a small village, everyone in the village knows her, and she knows everyone, the problem with the village is that for the small grocery requirements, villagers have to go to the nearby town, which costs them their whole day. Sarah identifies the problem and decides to open a small grocery store by the side of her house. She travels to town to buy the necessary items in bulk, brings them back to her place, and sets up the shop.

The shop became an instant hit, and people from all over the village started coming to her. She took advantage of this situation and hiked the prices of some products and services here. Sarah is enjoying a monopoly, and as people do not like to travel to the town to buy their groceries readily pay the hiked prices. It is a simple example where an increase in the price does not affect the demand and sales of Sarah's grocery store. Therefore, Sarah has strong power to decide prices and good business.

Taking the same example further, Monika opened a second grocery store in the village, and then the competition was established between Sarah and Monika. Monika started providing offers and discounts to attract customers, and hence it started affecting the customer base and revenue of Sarah's store. Now, there is no monopoly for her in the village, and thus she has to think of new ideas to attract customers to her grocery store. So again, this is an example of having weak pricing power.

This has been a Guide to Pricing Power Definition. We explain what is pricing power companies & stocks, performance during inflation, types, and examples. You can learn more from the following articles –

• Market Power
• Price Maker
• Monopsony