Pricing Power

What Is Pricing Power?

Pricing power is an economic term that portrays the effect of a change in a company's product price on the quantity demanded of that product. Pricing power is linked to the price elasticity of demand. Price elasticity is a measure of the degree to which people, consumers, or producers change their demand or the amount supplied in response to price changes. For instance, in the event that the price of a decent goes up, the propensity is that the demand for that kindness go down as individuals will search for less expensive alternatives.

Pricing Power Deconstructed

On the off chance that a company doesn't have a lot pricing power, an increase in their prices would reduce the demand for their products. A company that has substantial pricing power is one that furnishes a rare or unique product with few rivals in the market. In this case, assuming the company raises its prices, the increase may not influence demand since there are no alternative products on the market that consumers can pick all things considered.

Scarcity of resources can give a company high pricing power; in the event that the resources for a product won't be quickly gotten, the price of those resources will increase since there is lacking supply to fulfill need, which pushes up the price of the end result for consumers.

For instance, when the iPhone was initially presented by Apple, the company had strong pricing power since it was basically the main company offering a smartphone and associated apps. At that point, iPhones were costly, and there were no rival gadgets. Even as the main rival smartphones arose, the iPhone actually occupied the high finish of the market in terms of pricing and expected quality. As the remainder of the industry started to make up for lost time in service, quality, and app availability, Apple's pricing power reduced.

The iPhone didn't disappear from the market as additional participants showed up on the grounds that Apple started to offer new models of iPhones including less expensive models for spending plan disapproved of consumers.

Scarcity and Pricing Power

The scarcity of a resource or raw material influences pricing power essentially even more so than the presence of contenders with comparable products. For instance, different dangers, for example, calamities that put the oil supply at risk, lead to higher prices from petroleum companies in spite of the fact that rival suppliers exist in the market. The narrow availability of oil combined with far and wide dependence on the resource by different industries guarantees that oil companies hold huge pricing power over this commodity.

Different industries show strong pricing power during times of high demand and scarcity. Alluded to as dynamic or flood pricing, neighborliness, transportation, and travel industries will generally increase their prices for facilities and services at busy times like occasions or during special events.

Fast Fact

Investors consider a company's pricing power while choosing the value of a company and its shares. The ability to raise prices without decreasing demand means that a company has a method for expanding revenues other than depending on the effectiveness of its management.

For example, on New Year's Eve, taxi and vehicle services essentially increase their rates as a result of the high demand for driving services. Lodgings increase the rates for their rooms on dates close to privately facilitated shows as well as during major occasions when the travel industry is expected to increase. There the pricing power of companies is fortified on the grounds that the demand won't be impacted by price hikes.

Highlights

• Assuming a company has a unique product, it will have strong pricing power on the grounds that the customer has no alternative provider for that product and must pay the price charged.
• A company's pricing power is linked to price elasticity of demand for its product.
• Pricing power portrays the effect of a change in a company's product price on the quantity demanded of that product.
• Assuming that there are a lot of contender products, the company will have weak pricing power.