7 points for determining the pricing power of a company
1. Margins
What effect do high – or even expanding – margins have? Insight: companies which are highly innovative normally generate higher gross margins because their share of added value is greater.
 | One example is Straumann*, a world leader in implantology and dentistry. |
2. Price wars
Which companies are able to stay out of price wars? Insight: differences between individual companies arise out of their market position and the market itself. In strongly regulated sectors such as the telecommunications industry, it is more difficult to pass on additional costs.
 | An example of a company with a low risk of involvement in price wars is Partners Group*. For the Asset Manager, the bottleneck is not client demand, but opportunities to invest capital for them. Correspondingly, demand is larger than the offering and price pressure is lower. |
3. Market growth
Do innovations drive a market? If so, leading companies often benefit from strong demand and do not need to make so many compromises on the price front.
 | VAT Group* is a good example. Its high-end solutions for the strongly expanding semi-conductor sector make the company a major power on pricing. |
4. Brand strength
What makes a strong brand? Insight: often a mix of various factors, e.g., high levels of innovativeness and a strategic brand leadership which gives rise to high levels of client loyalty.
 | Good examples are Cartier (part of Richemont*) or various brands belonging to Nestlé*, e.g., Nespresso. |
5. Added value
Does the company offer clients added value in comparison with price? Insight: this often leads to strong client loyalty and, thus, reduced susceptibility to price wars.
 | An example is Belimo*, which manufactures equipment for regulating heating, ventilation and air conditioning. This type of product generally has a very low share in the total costs of a building project, but can deliver high added value. |
6. Risk
Must a company accept higher levels of risk in order to generate the same margin as competitors? Insight: this usually reduces pricing power.
 | From outside, it is scarcely possible to quantify many risks – they are often only visible at a later date, namely when they turn out to be “too high”. For that reason, we are foregoing citing a concrete example here; the margin for discretion is considerable. |
7. Power concentration
Is there a strong concentration of power within the industry? Insight: in the technology sector, the so-called “winner takes it all” effect can be regularly observed. In other words, one company tops another and is subsequently able to maintain its pricing power. Typically, these are companies with platform models or knowledge-based business models.
The low interest rate environment over the last years has led to high liquidity on the financial markets. One consequence had been high levels of activity in mergers and acquisitions (consolidations, spin-offs and take-overs). This enabled the market leaders in the technology sector to further expand their strong position. Sector concentration is often measured in terms of the HHI (Herfinddahl-Hirschman Index). It can facilitate detection of market concentrations and the strength of (price) competition.
 | Temenos*, the leading provider of banking software, is one example of a company in an advantageous market position. |