Pricing power

Warren Buffet once said that the single most important decision in evaluating a business is the pricing power. If the firm has got the power to raise the price without losing business to a competitor, it is said to be a good business.

In conditions of heavy competition, the realistic pricing strategy involves small incremental steps to improve margins within the existing segment, products and pricing structure. This can lead to expanding margins and regular small price increase, which can defend unnecessary giveaways, applying surcharges, passing on change in cost or on adding a source of value.

Most B2B firms have a pricing team that captures the related intelligence to provide guidance into pricing the new products and the ways to analyze the competitors' negotiation. Most successful firms empower their Salesforce with the right tools to get a better price.

Pricing improvement that focuses on growing revenues can adopt the strategy to bring more business and penetrate in the existing customer base. However, in the last several years there has been a significant decline in the degree to which the firms passed through the change in cost.

The decline is associated with the decline in inflation and this has an important impact on the monetary policy as it affects forecast of inflation and its impact. A reduction in pricing power has been related to the absence of an increase in information in the US in the 1990s.

Such theories are also used in everyday trading. Academicians overestimate the amount of money available to capitalize quickly on the market inefficiencies and the availability of honest, inexpensive advice. Most investment fund managers are constrained to low turnover in their funds and are restricted in trading for their own accounts.

The pool of smart money available to speculate is not as large but the main issue is that it is not clear if the professionals are really competing to render efficient market strategies, or they are just exploiting the less sophisticated investors by declining the trade unless there is predictable profit.

The price will mostly gravitate towards the realistic value but some economists find that bubbles existed even in the most robust conditions despite the absence of under certainty in the investing solutions and the investment asset classes, while, the trading decisions are, mainly, based upon the evolution of strategies of others as they manifest the price behaviour.