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Pricing power is a term that is often used in the business world to identify the impact that a change in produce prices will have on the demand for that product. While the term can be applied to both the lowering and increasing of current prices, most businesses will focus on what would occur if prices were increased. A number of factors go into determining the pricing power of a given good or service, including uniqueness in the marketplace, competition from similar products, consumer perception of the quality of the product, and the effectiveness of the company’s ad campaign.
Inherent in the assessment of pricing power is the need to understand what is called the price elasticity of demand. Essentially, the elasticity refers to how different factors impact the demand for a given product. The concept holds that when any type of changes occur in the circumstances or perceptions of consumers, the demand for the product will be affected one way or the other. This will open the door for the price of the product to be lowered or increased in order to meet the new set of circumstances and thus maintain or even possibly grow the client base.
When a company wishes to consider increasing prices for its products, taking the time to evaluate the marketplace is essential. This investigation often begins by ascertaining the current beliefs that consumers hold in regard to the products themselves. If they are perceived as being of higher quality than products offered by competitors, the pricing power may be somewhat stronger. Should that recognition of quality be tempered with a general consumer consensus that the product is currently priced at the high end of the spectrum, this may diminish pricing power to some degree. This is because some consumers may greet a price increase by switching to a product they consider of lesser quality, but still within a reasonable price range.
This means that pricing power has a lot to do with what value consumers perceive the product to provide, both in terms of quality and of price. Ideally, a company offers products that meet customer expectations in terms of performance, while setting the unit price at a level those consumers readily accept. By using this principle of value-based pricing to determine what the market will bear and still keep demand high, businesses stand a better chance of remaining competitive over the long-term, while still earning a decent amount of profit.
@Potterspop - I half agree with your thinking. While the pricing strategy you describe is very evident amongst long established brand name companies, there are also examples of price reductions in the new product market.
A good example would be the Kindle, which was quite expensive when it first came out, and maintained that niche of exclusivity. Then, as competitors like the Nook emerged into the market consumers voted with their wallets.
There wasn't really the opportunity for the Kindle to develop any kind of exclusive status, so prices had to be lowered to maintain sales.
Don't you think that companies with pricing power tend to abuse it to some extent?
In my opinion there are several big brand names that have cornered a market, in reputation at least. They can and do happily raise their prices, regardless of what the competition are doing.
I see this all the time with luxury goods. My friend buys a couple of purses a year from one design company, and never grumbles that they cost 5% more each time. I could argue until I'm blue in the face that another (cheaper) brand is just as cute, useful, stylish or whatever and it would make no difference.