Pricing power

Pricing power is a company's ability to raise prices without losing meaningful sales volume to competitors or driving customers away. It usually comes from something that makes the product or service hard to substitute, a strong brand, high switching costs, a genuine performance advantage, or simply having little real competition.

A business with real pricing power can pass rising costs on to customers and protect its margins during inflation or supply shocks. A business without it has to absorb those cost increases itself, or cut prices to stay competitive, and its margins get squeezed instead.

Expanding margins over time are one of the clearest signs pricing power exists, since it shows the company is keeping more of each revenue dollar even as costs move around it. The reverse, margins compressing while revenue grows, can be a sign that a company is winning business mainly by cutting prices rather than genuine demand, a much weaker position.