In the face of rising business complexity and competitive pressure, many firms succumb to price pressures and enter pricing wars. Others focus on creating, quantifying, and capturing pricing power from their market. Since 2011, with help from Warren Buffet and Jim Cramer, Wall Street financial analysts have begun paying close attention to firms with great pricing power. But what is pricing power? How do firms know whether they have it? And how does it affect profit? This research, based on a survey of 128 organizations, identifies and validates the drivers of pricing power and its impact on firm performance. In this article, I create and validate a pricing power assessment instrument that firms can use to get started. This article offers practical recommendations for go-to-market functions on how to start the pricing power discussion, how to measure it, and how to operationalize it.
Competition is fierce
Cutting prices or putting things on sale is not sustainable business strategy. The other side of it is that you can’t cut enough costs to save your way to prosperity. –—Howard Schultz, CEO of Starbucks (Gossage, 2011) The business world continues to experience dynamic changes. Change is everywhere. Its pace feels exponential, it has tremendously increased competitive pressures, and it has disrupted the world of pricing (see Table 1). Faced with tremendous pricing pressures, many executives have succumbed to competitive intensity by entering price wars, not fully realizing the consequences of such actions (Kramer, Jung, & Burgartz, 2016). A 2016 global pricing study reported that 82% of companies complained of pricing pressures, 49% were experiencing a price war in their industry, and only 30% managed to increase prices successfully in their market (Simon-Kucher & Partners, 2016). While most firms compete on price, others have realized that, after being faced with pricing pressure, years of flat demand, and several waves of cost optimization efforts, they must think differently. They cannot cut their way to prosperity. There is no winning in a price war. Firms have no choice but to invest massively in innovation processes to create value for their customers and markets (Hinterhuber & Liozu, 2012). Wall Street has begun to pay attention to this shift, and financial analysts have started assessing firms’ pricing power (Krishna, Feinberg, & Zhang, 2007). Success stories of pricing power masters have emerged in the financial news (e.g., Apple, Starbucks, Google, Lego, Disney, 3M, Grainger, Netflix, Johnson & Johnson, Caterpillar, Sealed Air). In March 2016, Jim Cramer (Stevenson, 2016) observed: “Sometimes, it just comes down to figuring out who has pricing power: who can raise prices and who can’t.