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What Is 'Pricing Power'?

Pricing Power is your ability to raise your prices over time. The less value you capture, the greater your pricing power. It's related to the economic concept of "price elasticity": how sensitive are your customers to price variations.

The higher the prices you can command, the more reliably you'll be able to collect sufficient profits to remain in operation.

Josh Kaufman Explains 'Pricing Power'

Imagine doubling your current prices. If you’d lose less than half of your customers, it’s probably a good move.

Pricing Power is your ability to raise the prices you are charging over time. The less value you’re capturing, the greater your pricing power.

Serving customers takes time, energy, and resources — the more you earn per customer served, the better your business. Changing your prices can help you maximize your results while minimizing your effort and investment.

Pricing Power is related to a concept economists call “price elasticity.” If customers are very sensitive to the price of your offer, you’ll lose many customers with even a slight increase in price, meaning demand is “elastic.”

Established semi-commodity markets like toothpaste are a good example: unless you’re able to create something new and unique that customers badly want, dramatically increasing your prices is a good way to ensure everyone stops buying your product and starts buying from your competitor.

If your customers aren’t price sensitive, you could quadruple the price with little change in sales. Take luxury goods, for example – customers purchase them because they’re expensive Social Signals that are exclusive because they’re costly. Increasing the price of designer handbags, clothing, and watches is likely to make those items more desirable, not less.

Economists like to spend time graphing and calculating price elasticity, but it’s not necessary — unless you already have accurate Norms, you can’t really know how much pricing power you have until you actually change your prices and watch what happens.

Fortunately, unless you’re an established player in a large and active market (in which case you’ll have Norms to work with), changing your prices very rarely has permanent effects unless your prices are broadly publicized and scrutinized; you can Experiment to find what works.

Pricing Power is important because raising your prices allows you to overcome the adverse effects of inflation and increased costs. Historically currency issued by any government tends to decrease in value—there are many strong incentives for officials to increase the supply of currency, which debases the value of that currency over time.

As a result, it takes more currency to purchase the same products and services necessary to stay in business, increasing your business’s Sufficiency needs. Without adequate pricing power, your business many not be able to remain sufficient in the face of higher expenses.

The higher price you can command, the more reliably you'll be able to maintain profit sufficiency. If you have a choice, choose a market in which you have pricing power—it’ll be much easier to maintain sufficiency over time.

Questions About 'Pricing Power'

• How sensitive are your customers to price increases?
• Would raising your prices make it easier for your business to stay sufficient?
• How much room do you have to raise prices without losing too many customers?

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"The moment you make a mistake in pricing, you're eating into your reputation or your profits."

Katharine Paine, founder of The Delahaye Group

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https://personalmba.com/pricing-power/

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