On a flight from Montreal to Orlando, I read an article in the Financial Post Magazine, May 2011 edition. The magazine is a month old, but the frontpage title "SWOT TEAM!" caught my eyes. Note, this is one of the very few times that my flight wasn't complete consumed by the personal entertainment system -- simply because I saw every interesting movie it has to offer.
The article is an easy read. The take home message for me is that I learned a new term called pricing power.
The term pricing power is noted in the legend of the article, but I had to read the article twice before locating it in the article body. The term is new to me, but it's self-explanatory; it's the power to price your product.
Quote:
"You want to look for companies and industry sectors where companies still have pricing power. Companies that don't have pricing power will see their margins squeezed and you will have a higher risk of earnings disappointment there."
Well said! The logical questions is how does a company or an industry possess or establishes pricing power. I think pricing power can be formulated by supply, demand, and product differentiation. It sounds trivial but it's not.
Economy 101 taught us supply and demand. Check!
How does product differentiation come in? How does it matter? How does it throw off the balance between supply and demand? Some product are so unique, innovative, and forward-thinking that the the demand has been fully established yet -- the consumer don't know they need/want to consume it.
The greatest pricing power is supply is low, demand is high, and product differentiation is great. That's to say that "you are the only one in town". You have monopolized the market. Also the product must be so novel that there is no pricing referencing to predetermine the value of the product.
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