How to identify companies with pricing power

[ruzaini]

Actually Pricing Power is also a function of the Supplier, not just customers. Agree that Gross Margin is the best indicator of amalgamated pricing power.

But I think Pricing Power is subset of Bargaining Power. Bargaining power is more than just price. For example when a company's going down, dorment debt holders suddenly has bigger bargaining power. Or when sudden catalyst like regulation comes in, say restriction of import, the rise of input cost will depends on the bargaining power or relative strength of the parties.

Once I asked a company why their proprietory tech is not IP protected. He says their main customers are the oil majors... so asked me if suing them is a choice if they choose to infringe their IP. That led me thinking about bargaining power is not so simple as on paper.

Thanks for your input. Yes, I agree. In fact, you can look at it both ways from suppliers perspective vs buyers perspective. But essentially the core factor is “price elasticity.” If customers are very sensitive to the price of your offer, you’ll lose many customers with even a slight increase in price, meaning demand is “elastic” which is why I mentioned the following in my article:

>> When customers dependent on company’s products or services and there is no perfect substitute.
>> When the company is a monopoly and barrier for new entrants is high.

If your customers aren’t price sensitive, you can double the price with little change in sales. Or in my example of CSPC, where its customers are dependent on its drugs and there is no perfect substitute. It gives the company tremendous pricing power, which some would argue as unethical because it cures terminal diseases. Just like in the case of Valeant Pharma, who is notoriously known to raise prices of their best selling drugs. The company raised prices on drugs for such diseases as diabetes, acid reflux and serious heart conditions, in some cases by more than 500%.