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Pricing Power: How This Powerful Metric Can Impact Your Business

Pricing Power: How This Powerful Metric Can Impact Your Business

Pricing Power: How This Powerful Metric Can Impact Your Business

If there is only one business metric your organization MUST absolutely score an ‘A’ in, that should undoubtedly be in Pricing Power.

While the importance of brilliant management, quality product, competent staff, good marketing strategy, and cost-saving production/operating techniques to a business cannot be discounted, they don’t cover a lot of business mistakes (which will surely happen from time to time) the way excellence in pricing will.

Sometimes your operating practices may not be as optimal as it should be or your lead conversion may be far off the mark.

Other times, it could be an inept management, bad business decision, inflation, or an unexpected catastrophe like COVID-19.

Whatever business misdeed your company may fall in occasionally, possessing a strong price power would ALWAYS ensure the sales keep flowing in unhindered.

It would also give you the confidence to increase your price as you deem fit without fear of losing customers – a situation that would never cease to benefit your company’s stock price.

Pricing Power: How This Powerful Metric Can Impact Your Business. In this article, we talk about what pricing power is and its impact on your business and stock price.

 

What Is Pricing Power?

A business is said to have pricing power when it can raise prices above inflation without losing old customers or impacting sales.

While this feat is something a lot of businesses desire, in reality, only a few are able to carry it out and we will show you why shortly.

When your company can comfortably set favorable prices for its products or services as it sees fit without fear of customer backlash, you can earn higher profits. And higher profits provide you with sufficient cash to reinvest or pay off as dividends.

In addition to that, during economic downturns like what we currently have due to the coronavirus, you will recover faster than most companies.

If you lack pricing power, you will struggle with margin challenges during inflation – when the costs of goods start to rise.

 

 

5 Ways Your Company Can Effectively Gain Long-Term Pricing Power

Some of the ways a few companies like Apple, Amazon, Samsung, and Nike have being able to build an enduring pricing power include:

  • An ever-growing demand that has surpassed supply
  • Selling price-inelastic goods (that is, products with few alternatives and weak substitutes. E.g. petrol, cigarettes, tap water, salt, etc.)
  • Being in a field where the barrier to entry for newcomers is significantly high
  • Having a legal monopoly
  • Selling goods that has no perfect substitute

 

One good example of a company with good pricing power is Xero.

Xero Limited

Xero is a cloud-based software firm that provides online business and accounting services to customers. The platform links small businesses to their customers, accountants and bank partners.

Since switching all business operations to another provider seems too tasking and unpleasant, Xero can push new prices through with little risk of losing customers.

To show you how sticky Xero’s customer base is, their customer churn rate per month for the last two consecutive years was pegged at 1.1% to 1.13%.

What this translates to is that as high as 99% of their customers are consistently paying for their service every single month.

 

Pricing Power and Its Effect on Your Stock Price

There are important factors that determine the price your stock can command at any given time.

A couple of them are revenue, profit, growth rate, and ability to adapt to higher internal costs and changing market conditions.

Pricing power affects every one of these metrics and here is how:

 

Revenue

When you can raise prices without reduction in demand, that makes it easier to sustain a healthy growth rate.

This is particularly important for companies dependent on the subscription model as their revenues are tied to regular customers’ patronage.

 

Profit

Having the power to safely raise prices without reprisal allows you to maximize your profit.

With every price increment, you are reaping richer returns per customer with practically the same amount of investment and effort as before.

 

Growth Rate

Pricing power may not be the only factor that impacts the ability of a business to grow, but knowing the amount of freedom you have in stretching your prices enables you to securely plan and work towards future growth.

 

Ability to Adapt To Higher Internal Costs and Changing Market Conditions

As your company grows, your operating expenses naturally increase along with it. A strong pricing power makes it possible to remain profitable and have a sound bottom line.

Key Takeaway

Pricing is a cornerstone of your business resilience.

Have a look here at examples of companies that went successfully on that path

We are a team with history in pricing & commercial excellence, more about us one click away

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Pricing Power: How This Powerful Metric Can Impact Your Business

Baydhir Badjoko

MD, The Consultants bvba

https://www.linkedin.com/in/theconsultants/