Jeet Mukherjee, the Chief Strategy Officer at Holden Advisors, has conducted interviews with founders and CXOs to understand pricing power. Despite receiving various descriptions and definitions from almost 50 conversations, there was no clear consensus on what pricing power truly is. Leaders mentioned attributes such as channel partnerships, quality, brand, and product differentiation as factors influencing pricing power, but there was no single definition that emerged from the discussions.
Building on Warren Buffett’s idea of being able to raise prices without losing customers, Mukherjee delves into the concept of creating differential value over time. This involves ensuring that the price of a product or service aligns with the value it provides to customers. Companies that price their offerings over the differential value created for customers risk losing their customer base, as they are not providing adequate value in return. By creating and maintaining differential value, businesses can establish pricing power, ultimately leading to long-term profitability.
Mukherjee introduces a Pricing Power Self-Diagnostic tool that focuses on measuring differentiation and go-to-market excellence as key factors in determining pricing power. Companies with highly differentiated products need to effectively bring their solutions to the market to gain and protect their pricing power. By analyzing the relationship between price, differentiation, and market share, it becomes evident that companies with pricing power are over 1.5 times more profitable than their competitors, showcasing the importance of differentiation and market execution in maintaining pricing power.
The article categorizes companies into three profiles based on their level of differentiation and ability to execute in the market: strong differentiation and go-to-market excellence, strong differentiation but weak go-to-market, and weak differentiation. For companies with strong differentiation and go-to-market excellence, the focus should be on sustaining pricing power through cultural and operational improvements. Those with strong differentiation but weak go-to-market capabilities need to address price leakage and improve their influence and execution in the market. Companies with low differentiation should focus on building and expanding value as a capability within the organization to enhance their differentiation and long-term pricing power.
As markets evolve and competitors introduce new features and benefits, companies must adapt their pricing strategies to remain competitive. Short-term strategies may involve implementing processes for quick adaptation to market changes, while long-term strategies should focus on understanding evolving customer needs and industry dynamics to defend pricing power. By staying attuned to market shifts, businesses can ensure that they continue to provide value to their customers and maintain pricing power.
