Pricing Power – or the power to impose your price is a bit the dream of every entrepreneur or more broadly company. But what does this consist of, and how to maneuver to get into this situation?
Pricing Power: what does it consist of?
You are in the situation of Pricing Power, which basically means that you can impose your prices, if after an increase in your price you do not lose (or only very few) customers and you continue to gain almost as many customers as before such price increase.
Pricing Power: why is it important for a company?
If the company is in the situation of being able to impose its prices, i.e. being able to increase its prices without losing customers, two effects occur mechanically:
- The turnover is increasing, which shows to the market, competitors and employees that the company is growing.
- The operating result increases linearly, which gives the following possibilities:
- “Take profits” for example by increasing dividends.
- Increase customer acquisition spend (e.g. increase sales force and/or strengthen communication) to gain more customers, and prepare for the future with an even larger customer base.
- Increase R&D, support, content or other expenses to make the product or service even more robust and desirable, which will strengthen your position, and allow you to consider further price increases in the future.
- A combination of these possibilities.
What are the prerequisites to be in the situation of Pricing Power?
In order to be able to increase your prices without being sanctioned, you should ideally be in the following situations:
For customers already acquired:
- Your product or service must correspond to an important need for your customers.
- Your product or service must satisfy users.
- The competition’s product or service is not perceived as significantly better.
- The brand image of the competition is not perceived as significantly better.
- And above all the most essential condition: the switching cost for the customer must be significant. Such switching cost can be one or more in the following list:
- The purchase price of the competition’s product or service.
- The time to invest in the training necessary to properly master the product or service.
- Loss of existing functionality or data, requiring additional time to compensate.
- No competition, at least up to or with the same desirability of your products or services (this frequently exists in the luxury industry)
- Sales methods that make products and services incomparable
Some examples of companies or products or services in a Pricing Power situation
Its price positioning in each country is in the “high-end” of soft drinks. The range of prices in the countries is very strong, in order to adapt to the purchasing power of a large clientele. Its distribution channels often “impose” the brand, and the brand image is “nice” and “dynamic”. Customers love the product.
Historically, the price covered a perpetual license, and its price was around 200 € in Europe. From now on, a large part of customers have adopted the subscription mode which is of the order of 100 € per year. Microsoft has announced the price increase of the offer… Why can Microsoft afford to raise its prices?
Because it really ticks all the boxes identified above:
For many users, MS Office is essential, even if the degree of use of features of the suite is very variable from one user to another.
Competing products are perceived to be inferior in terms of functional coverage.
Microsoft’s image is very good, the current CEO has rejuvenated it well.
And most importantly, switching to similar products is perceived as complicated and laborious, user training time is perceived as important, and competing products are perceived to perform less well with missing features.
In addition, Microsoft continues to invest and enrich this offering, making the lives of competitors harder and increasing customer satisfaction.
With the richest catalog of VOD offers, a user experience close to perfection, and an impeccable brand image, Netflix has gained in a few years the luxury of being in the situation of having Pricing Power. Once you are used to the richness of its catalog, for the whole family, even in case of price increase, you will most probably not cancel it. Replacing Netflix for its users probably requires subscribing to several VOD services, which are more expensive and less convenient.
How to maneuver to be in the situation of Pricing Power?
In general, in order to find itself in the situation of having Pricing Power, the company and/or the services and products must have existed for a few years, and the competition must be unattractive. In the customer acquisition phase, this is often difficult, so the company has to deal with competitive prices and make a lot of effort to win customers. On the other hand, if the product or service is unique, it is probably worth trying to temporarily test different price levels.
And most importantly, once you have a customer base, take a good look if you meet the above criteria, many companies are in a Pricing Power situation, without knowing it and without applying it.
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