Pricing power and how it works

How lasting pricing power works

As the economy is struggling, governments and companies are in a battle for pricing power. Russia is proof positive that shortages and artificial scarcity alone are not enough. Innovation, a good reputation, a healthy balance sheet, robust demand and, of course, patent protection are much more important.

What does pricing power mean?

Pricing power refers to the special ability of a single economic entity to charge above-average prices that add up to a better return on investment.

But what does it take to generate higher prices, margins, returns, and wages in a competitive environment? What we do know is that the more scarce and coveted a good or a service is, the greater the pricing power. While some paths prove to be sustainable, others are like a double-edged sword.

1. Artificial scarcity

Anyone who relies on artificial scarcity alone is skating on thin ice. In Russia's case, the tide turned to Moscow's disadvantage as Europe (in a rare act of solidarity among those in business, society, and politics) began to abandon Russian gas. The price boom has now been followed by a crash.

2. The power of better ideas

Sustainable pricing power, on the other hand, is based on innovation and robust brands. Suppliers of renewable energy, among others, are benefiting from high gas prices. They create new jobs, generate new orders, and pay taxes.

What are the distinguishing characteristics of companies with pricing power?

According to the “Global Equity Strategy" publication, companies in the “Quality” category perform best in the current environment with strong brand names, a long-standing track record, conservative balance sheets and competitive advantages thanks to patents and innovation leadership.

These include companies in the healthcare and IT sectors, as well as industrial companies and manufacturers of consumer staples. In healthcare, pricing power has been very strong in the pharmaceutical, biotechnology, and life sciences sectors for many years.

Pricing power of Swiss companies

Margin stability depends on the industry

The companies in the beige area have been able to maintain or expand their margins at above average rates in the last ten years.
Source: 30.06.2022
Last data point: Bloomberg, Credit Suisse

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