Warren Buffett has stated: “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
Does your company have pricing power? Sure, it does. Almost every business has some. Even businesses that believe their products are just a commodity likely have pricing power somewhere in their structure. The question is where – and how do you tap into it?
The key is to be strategic in identifying your pricing power. Our pricing consultants have seen few businesses that have pricing power across their entire range of offerings. Look for narrow segments or even specific transactions within your business where your offerings can support slightly higher prices. Remember, even the smallest increases in price can have a dramatic impact on your bottom line.
Here are three key areas where you may have pricing power. Think about your business as you consider each of these potential areas of opportunity:
Instead, measure the economic value that your offering delivers to customers. Is the price in line with the economic benefits your customers enjoy? It’s worth the time and energy to analyze the economics that your products deliver. Be sure that your sales team is effectively communicating the economic value and that customers recognize the value.
What is the price elasticity of your offering? If prices were increased by 10%, how much market share would you lose? Or would you lose any at all? Historical pricing data taken from your invoices can be used to measure price elasticity. Don’t assume that just because you raise prices you will have a drop in volume. Every product is different, and each has its own price sensitivity. Price elasticity can help you identify products with pricing power.
A significant amount of pricing power can be lost at the point of sale. Sales teams often struggle to capture full price due to their inability to sell value. Rather than articulating the economic benefits that will lead to higher prices, sales reps too often grab discounts to quickly close a deal. Train your sales team to sell economic value, and you will be able to leverage your pricing power with more customers.
In fact, our pricing consultants find that you can leverage your pricing power in a variety of ways. High-value products, small customers with little buying power, and situations with little or no competition all present opportunities for leveraging pricing power with minimal risk.
Want to forgo the pre-price-increase prayer session? Harness the strength of your pricing power, and make those price improvements with confidence!