Pricing Power

What It Is:

Pricing power is the effect the price of a good or service has on the demand for that good or service.

How It Works/Example:

For example, a company that manufactures a pill that cures cancer has a lot of pricing power: the demand for the pill will probably change very little if the price goes up. A manufacturer of granola has much less pricing power. Consumers can easily trade away from one manufacturer's brand to another brand (or even substitute a different product, such as cereal or nuts).

Why It Matters:

Pricing power is the key to stable demand and thus stable revenues and profits because it allows a company to raise prices without losing business to a competitor. In fact, the ability to raise prices is one of the most important fundamental characteristics that investors analyze when researching companies (usually as part of a SWOT analysis), in part because pricing power reduces the need to rely entirely on managerial talent.

Pricing power also applies to entire economies. Those countries that offer unique natural resources or labor propositions are more able to raise the price of those goods and services without reducing export business, causing deflation, or stagnating.