Pricing power

Pricing power decides who keeps the value a product creates. A company that cannot raise prices when its costs rise passes the loss to its shareholders, and one that must cut prices to hold customers is spending its margin on volume.

A price test reveals only part of a strategy. Brand, differentiation and switching costs may affect willingness to pay, but they can also change acquisition, retention or cost. A controlled price change gives direct evidence for a defined group; customer research, competitor behavior and past results offer clues, but do not fully substitute for it. The test does not measure every source of advantage. If demand falls, the business has not demonstrated pricing power for that segment and moment, though it may have other advantages.

Ferrari shows that pricing power is a choice about what to give up. Its annual report says the low volume strategy limits potential sales growth and profit compared with manufacturers that chase volume, and management accepts that in exchange for the price its clients will pay. A company that cannot decide which growth it will forgo is unlikely to hold its price, because each extra unit sold lowers the value of the ones already delivered.

The power belongs to a customer segment at a moment, not to the company. The buyer who cannot take a delivery slot elsewhere, the buyer with a rival on the desk, and the buyer already thinking about leaving will answer the same price differently. Any single figure, whether a margin or an average price, hides that spread.

The distinction also changes how a company answers cost inflation. A firm with power can pass a cost rise through and keep its customers. A firm without it must absorb the cost, cut its own, or find that the customers it lost were the ones who paid the most. McDonald’s 2024 quarter shows the second path, and it is why boards ask about pricing power whenever input costs move.

The practical discipline is to treat a price change as an experiment. Fix the customers who see it, watch what they do over a full renewal cycle, and compare contribution, not revenue, before and after. Finance and product teams that agree the question in advance avoid mistaking one strong quarter for durable power.

Customers can be asked to pay more only until the price stops matching the value they see. Netflix in 2011 shows this at the scale of a public company. The increase hit members who already took both services, changed nothing they received, and arrived with a rebrand they did not want.

Repeated increases can teach customers to look elsewhere. McDonald’s raised prices to absorb cost inflation, and Kempczinski told analysts that industry traffic had fallen in the United States, Australia, Canada and Germany, and that lower-income households had grown more discriminating. Its own results attribute the U.S. decline to negative guest counts. A restaurant’s pricing power depends on the total value of a visit against eating at home, and the increases moved that comparison against it.

Power built on one source is exposed to a change in that source. Nvidia’s scarcity and performance advantage held, yet on April 9, 2025 the U.S. government told it that H20 exports to China needed a licence. The company took a $4.5 billion charge, and its first-quarter non-GAAP gross margin fell to 61.0 percent, or 71.3 percent excluding the charge. It guided to a loss of about $8.0 billion in H20 revenue for the next quarter. Its power over customers was intact; its access to one market was not. Scarcity has the same weakness: it lasts while capacity stays short and rivals stay behind.

Shortage is not the same as power. A supplier that charges more while capacity is short is renting a temporary advantage, and buyers remember the terms once capacity returns. The test is whether customers would still choose the product at the higher price with alternatives on the table, and whether the company would still want them to.

A retention figure cannot separate power from inertia. Contracts, habit and switching work can delay defection for a year, and a price rise that looks safe at the first renewal can look different at the third. Measure customers across a full cycle, and check whether the buyers who stayed are the ones the business wants.