Pricing power
The ability to raise prices without losing much volume. It comes from concentration, differentiation or switching costs, and shows up as margins that hold when costs rise.
Where you will meet it
Pricing power appears in 7 learning outcomes on the CFA syllabus. A few of them:
- Assess trends in how large an industry is, its growth, its profitability and the market shares within it
“Market share and its trend, often summarised by concentration measures such as the combined share of the largest firms, show whether a few firms dominate and whether leaders are gaining or losing ground, which bears directly on pricing power.”
- Work out profitability margins and explain what they mean
“Gross margin is gross profit over revenue and reflects pricing power and production cost.”
- Contrast monopoly, perfect competition and the market structures in between
“Monopolistic competition sits between the two — many sellers, but differentiated products give each a sliver of pricing power.”
- Explain how the nature of the markets a company sells into bears on its creditworthiness
“Stable, predictable demand, pricing power, high barriers to entry, differentiated products and low sensitivity to the business cycle all support steady cash flow and so lower default risk.”
See also
Differentiation · Switching costs
Practise it
Practise pricing power until it is automatic: questions that explain every wrong option.
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