Seth Godin wrote a blog titled “About Pricing Power” where he claims the type of company or individual who has the power to determine prices is irreplaceable, essential and priceless.
Also this week Bloomberg published an article titled “Buffett Says Pricing Power Beats Good Management When Evaluating Companies.” Here is a paragraph from the article.
“The single most important decision in evaluating a business is pricing power,” Buffett told the Financial Crisis Inquiry Commission in an interview released by the panel last week. “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.”
My first thought after reading Buffet’s quote was “if a firm can raise prices without losing business why don’t they?” The answer to that will require more creative thought.
The second question though was what do Seth Godin and Warren Buffet really mean when they talk about pricing power? Technically it means inelastic demand curves, but that still doesn’t really tell us anything. What I think defines pricing power is value. How much value does your product offer relative to your competitors? Value is in the wallet of the customer, so it’s a combination of your differentiation and the value your customers place on that differentiation. Pricing power means creating more value than your competitors.
My spin on their comments: Seth Godin says create more value, then you can charge for it. Warren Buffet says he looks for companies that create value and then capture it through value based pricing. Mark Stiving says … I agree with both of these very smart guys. Do you?