What is pricing power?
Pricing power is the company’s ability to raise prices without reducing demand for its products. The more pricing power you have, the easier it is to raise prices. Pricing power is generally determined by how unique or essential a product is in the eyes of customers, or the unique value it provides to customers relative to competitors.
For eg: A customer who is taking medicine for a critical ailment would continue to buy the same brand despite the increase in price since it is an essential product for him & he has trust in the brand. Also, if you are buying jewellery from a branded store rather than a local shop you would be willing to pay more charges for the making because of the better designs & the trust in the purity of the product at the branded store.
Why do you need pricing power for your product?
Pricing Power is important because raising prices allows you to overcome the adverse effects of inflation and increased costs. For example, when there is an increase in the cost of crude oil, paint companies’ margins go for a toss, in order to retain it needs to pass on the cost increase to customers. Unless the company has differentiated products, a unique value to offer & brand reputation, it is not possible to command pricing power.
What do you need to have pricing power?
Companies would need to keep delivering a unique value to be able to command pricing power. This unique value can be superior product quality, faster support and service, brand reputation, number of alternatives available, switching costs etc.
Let’s look at these in detail:
Bring Innovative products to the market: The first step is to launch relevant products which address any unserved need or a customer pain point. As long as your product is relevant and a first mover in the market, you can charge a premium. The key here is to keep innovating and keep bringing differentiated products. By continuously bringing innovative products, customers won’t consider switching from your brand. Also, constant innovation doesn’t give too many alternatives to switch. After a company reaches that stage where customers believe that they will get the latest products, you can command pricing power even on the existing products despite the competition (who would have launched similar products later).
Build trust in the product’s quality and service: Your product should have superior quality which users should agree with. Quality should be tangible parameters which can be measured like the product’s ruggedness, durability, convenience or user-friendliness. In case of any failure or support, the service support should be super-fast. Once this is built for a few products and for a couple of years, customers start to build trust which then helps in successfully launching other products & services faster.
Build a brand: Brand building is important to get more first-time users. The more the existing users would promote the product, the easier it is for first-time users to trust & try. Hence sharing customer testimonials, and brand endorsements, and generating more followers is crucial to make it easier for new customers to try. Brand building is important to communicate your’s product’s quality promise to a larger base of customers. This also acts as a temporary cushion in case you are lagging on the innovation cycle for a short period. For eg. Maruti(the market leader in the Indian passenger vehicle car segment) didn’t bring more SUV variants or electric vehicles earlier than competitors and still didn’t lose the market leader position (lost market share though). However, since this is a temporary cushion, companies have to go back to point 1(i.e. keep bringing innovative & relevant products) to command pricing power over competitors.
Once you have innovative products, customers’ trust in the product’s quality & an established brand, the cost of experimentation becomes high for a customer to try and switch, hence ensuring the demand for your products doesn’t drop despite the price increase. This price increase also helps retain margins in case of an input cost increase.
Conclusion :
The important thing for companies and 4P managers is that the more you can decommoditize your product or service, the better your pricing power becomes.
For example, B2B procurement for IT hardware(laptops/desktops etc) traditionally has been dependent on product quality, price, brand reputation, and relationship with the client. In order to add that Unique Value company can look to add more Services to its product offering like Zero downtime (faster issues resolution, giving actionable insights in a single dashboard to the IT team), Flexible leasing plans like monthly or quarterly payments instead of a CAPEX to free business capital; end-to-end device management from demand-based device provisioning to Asset disposal and also to reduce business carbon footprint. These add-on services not only increase the stickiness with the customer but also allows the company to command pricing power.
In a nutshell, the key is to differentiate a product in such a way that customers are willing to pay higher prices. Innovation cannot stop, and to keep that pricing power, companies need to continue to innovate better and faster than the competition
Thoughts on Product Management 