Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 321

How to spot genuine pricing power

Hypergrowth and crushed expectations are usually the investing themes that capture the most flattering financial press. A much less visible but even more powerful lever for the long-term investor, though, comes in the form of pricing power.

Businesses with a confluence of a strong brand, competitive position, and customer loyalty are often able to push through price increases alongside or even above inflation. Even if only applied with prudence, the ability to grow pricing at healthy rates speaks to the potential to surprise investors with higher-for-longer growth than short-term-minded investors might expect.

Start by inverting

One of the fastest routes to identifying businesses with pricing power is by inverting and screening out the price takers. For example, just about every commodity-centric business, from mining to farming, lacks pricing power because its products aren’t materially differentiated, and most end buyers don’t care about the sourcing. You probably care about who manufactured your shoes – branding matters in footwear – but probably never stopped to ask where the rubber in them was sourced from.

There are gradations when it comes to pricing power with commodities, of course, mostly having due to the concentration of supply and how long it takes new supply to come online. But a steel manufacturer looking to buy a certain grade of iron ore doesn’t much care whether it was dug from the earth by, say, Rio Tinto or BHP Billiton, and the huge majority of commodity producers are price takers.

Retailers are another group that struggles to retain pricing power because barriers to entry are low and clever concepts are easily and quickly copied. The largest players can lean on suppliers for better terms, but even they struggle to flex pricing power with customers. They later resort to ‘investing in price’ in order to win back market share. Incidentally, shares of Woolworths today are no higher than they were six years ago.

Australia’s big banks are not immune to market forces either despite the oligopolistic nature of the sector. It’s a pain to change banks, thus they set their fees accordingly, but when it comes to setting rates it is largely set market forces that dictate their levels and the size of spreads.

Go positive on who has the power

So we just struck off financial, energy and materials businesses, which wipes away more than half the opportunity set by value of the ASX. Also, much of what was said above is applicable to companies in other sectors as well, all of which should give you a better feel for the rarity of true pricing power.

The first thing you should know when trying to spot pricing power is that most companies that have it don’t advertise the fact -- even with investors -- because doing so might rub customers, suppliers, and regulators the wrong way. Large consumer companies aren’t shy in discussing pricing – Procter & Gamble, for example – mostly because the prices themselves are public and the customer base is so diffused. Once you get past that low-hanging fruit it takes more thought and digging to spot pricing power.

The next best place to catch management discussing pricing strategy is to get on an analyst conference call. Almost every mid- and large-cap company, plus many small-caps, host a conference call after they release earnings results that investors of all stripes can listen to (details are usually found in the earnings release or announced prior). While a company might not be so brazen as to directly say how much increased prices contributed to their growth during the period, they often provide useful colour that can help investors get a sense of whether pricing power exists.

Beyond a company out-and-out saying pricing power exists, investors can read between the lines of some financial measures. For example, if a business has high and stable gross margins, consistent revenue growth, and is showing no signs of losing market share, odds are decent the business has some degree of pricing power. Netflix is a prime example. The price of its standard streaming plan in the US increased from US$9 in 2014 to US$13 in 2019, over which its gross margin expanded by around 5% to over 36% and total revenue more than tripled.

Take note that just because a business has a premium brand or higher gross margins than its peers does not mean the business has pricing power. A luxury automaker probably has higher gross margins than one more focused on value and volume, for example, but the luxury automaker also has a smaller revenue base over which it can leverage its fixed costs, plus automaking is an intensely cyclical and capital-hungry business. That is to say, even if a luxury automaker has relative pricing power, it doesn’t mean they have absolute pricing power. In fact, in the US, prices for new vehicles basically haven’t budged over the past two decades despite total inflation of around 50% over that time.

Another quantitative directional indicator is based on average revenue per customer. If it is increasing faster than inflation and without driving down customer-level churn, it means the company is effectively raising prices or leveraging an existing strong relationship to cross or up sell, or some mix of both. A good example that is close to home is Xero, where churn rates in the core ANZ region fell a touch year-on-year despite a 4.8% constant currency increase in average revenue per user.

When the price is wrong

Just because a business has pricing power does not automatically make its shares a buy, of course. Numerous factors go into that sort of analysis, and even within pricing power itself it is important to watch the key underlying trends. For example, if a company is able to broaden its supply base or its own market is concentrating behind fewer players, both those trends bode well for pricing power. Likewise, if a company has been flexing its pricing power too hard for too long it can open itself up to disruption by more efficient competitors who compete on price and value rather than brand and prestige.

All that said, we think pricing power is a valuable trait for a business to possess for the long-term investor.


Joe Magyer is Chief Investment Officer of Lakehouse Capital, and Portfolio Manager of two unlisted funds, the Lakehouse Small Companies Fund and the Lakehouse Global Growth Fund. This article contains general investment information only (under AFSL 400691) and has been prepared without taking account of the reader’s financial situation. The Lakehouse Small Companies Fund owns shares of Xero.

Lakehouse Capital is a sponsor of Cuffelinks. For more articles and papers by Lakehouse, please click here.



It’s the large stocks driving fund misery

Longest positive run for Australian shares since WWII

Why August company reporting season was poor


Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Now you can earn 5% on bonds but stay with quality

Conservative investors who want the greater capital security of bonds can now lock in 5% but they should stay at the higher end of credit quality. Rises in rates and defaults mean it's not as easy as it looks.

30 ETFs in one ecosystem but is there a favourite?

In the last decade, ETFs have become a mainstay of many portfolios, with broad market access to most asset types, as well as a wide array of sectors and themes. Is there a favourite of a CEO who oversees 30 funds?

Meg on SMSFs – More on future-proofing your fund

Single-member SMSFs face challenges where the eventual beneficiaries (or support team in the event of incapacity) will be the member’s adult children. Even worse, what happens if one or more of the children live overseas?

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Latest Updates


'It’s your money' schemes transfer super from young to old

Policy proposals allow young people to access their super for a home bought from older people who put the money back into super. It helps some first buyers into a home earlier but it may push up prices.

Investment strategies

Rising recession risk and what it means for your portfolio

In this environment, safe-haven assets like Government bonds act as a diversifier given the uncorrelated nature to equities during periods of risk-off, while offering a yield above term deposit rates.

Investment strategies

‘Multidiscipline’: the secret of Bezos' and Buffett’s wild success

A key attribute of great investors is the ability to abstract away the specifics of a particular domain, leaving only the important underlying principles upon which great investments can be made.


Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.


Confession season is upon us: What’s next for equity markets

Companies tend to pre-position weak results ahead of 30 June, leading to earnings downgrades. The next two months will be critical for investors as a shift from ‘great expectations’ to ‘clear explanations’ gets underway.


Australia, the Lucky Country again?

We may have been extremely unlucky with the unforgiving weather plaguing the East Coast of Australia this year. However, on the economic front we are by many measures in a strong position relative to the rest of the world.

Exchange traded products

LIC discounts widening with the market sell-off

Discounts on LICs and LITs vary with market conditions, and many prominent managers have seen the value of their assets fall as well as discount widen. There may be opportunities for gains if discounts narrow.



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.