3P: Pricing power
The best business has pricing power. Investor Charlie Munger noted that a business with pricing power is “the ultimate no-brainer.”
How does that fit within the Placement, Promotion, and Product series?
Product. Pricing power exists relative to production costs. A knowledge worker uses ‘information’ to create their service. If the price of the information increases and the worker cannot raise their prices they do not have pricing power.
A coffee roaster might have a different perspective. If coffee is coffee, then one Brazilian farmer raising prices doesn’t affect the roaster. They shop around. Or, they can stick with the roaster and pass the cost increase onto the consumer. Which gets to…
Promotion. Pricing power exists relative to perceived value. If customers buy ‘milk’, a business has low pricing power. But if customers buy ‘milk, from grass-fed low hormone happy cows’, that is different.
Customers don’t buy one thing. There’s always an intangible. Brands demonstrate this. A Rolex doesn’t just tell time. McDonald’s doesn’t just provide sustenance.
Placement. Pricing power exists relative to distribution and retail options. Think about location. Landlords have pricing power over restaurant tenants.
The internet (with shipping) removes the landlord – and their power. Website hosting, online shopping carts, and 3PL have minimal pricing power over their customers. So, online businesses can be quickly profitable. But not all internet services are created equal. Facebook has pricing power for Facebook communities, not so for email newsletters or websites.
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Another aspect is Wholesale Transfer Pricing. This is part-of-the-reason restaurants are terrible businesses.
The Waiter's Pad 