Why Pricing Power Is So Important

Inflation
Image by OsakaWayne on Flickr.

Does Inflation Hurt Everyone?

What Pricing Power Really Means

  • If the business has no pricing power, it can’t change its $200 retail price. Its profit falls from $100 per unit to $90. The stock price of businesses in this situation typically gets punished during periods of high inflation because of their prospects for lower earnings.
  • If the business has enough pricing power to pass through its higher costs to consumers, it will boost its retail price to $210. That will leave it with the same $100 per-unit profit, with no impact on earnings. Consumers will see a 5% increase in what they pay, which is less than the 10% increase in the producer cost. Stocks of businesses in this situation typically do better than those without pricing power.
  • Some elite businesses have so much pricing power that they can pass the entire percentage increase through in their costs to consumers. In this case, a 10% increase in the retail price would make it $220. Profit would rise to $110 per unit, with a potentially sizable overall earnings increase to help bolster the stock price.

Be Prepared for Anything

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