Pricing power refers to a company’s ability to increase prices without significantly impacting demand for their products or services. This can be a powerful tool for a business, as it allows them to generate higher revenue without necessarily having to increase their production or sales efforts. However, it is important for companies to use this power wisely, as consistently raising prices can ultimately lead to a decrease in demand over time, as well as the potential for new competitors to enter the market. The following are types of pricing power.
In many cases, a monopoly has a great deal of pricing power as they have no direct competition. For this reason, it is common for monopolies to be regulated. For example, a telecom company that owns all the networks in a city could raise prices for internet access extremely high and people would need to pay as it is an essential service.
Brands with high social status enjoy significant pricing power. If a luxury brand lowers prices they typically enjoy a spike in sales but their brand may quickly lose brand value. As such, luxury brands have incentive to maintain high prices.
Products and services that are viewed as superior by customers. For example, a popular mobile device offered by a strong brand may easily command both a higher price and greater market share than the closest competition.
Products and services that offer something unique that is valued by a small subset of customers. Niche products may enjoy significant pricing power depending on the niche and their position in the market.
A commodity is something that customers view as undifferentiated. Firms selling commodity products have no pricing power whatsoever and must accept market prices.