In the last blog, I was puzzled by Google Ngram’s indication that pricing had only come to the attention of the public in the late 20 century. I continued the quest for an answer.
In their thorough and comprehensive book “The Strategy and Tactics of Pricing”, Thomas Nagle and Reed Holden explained that cost-based pricing (cost + profit) had been the historically common practice until 1980′s when companies of leading brand names discovered brand loyalty and its benefit to pricing. A quick NGram shows that their timing is more or less accurate.
It is now very clear that the understanding of pricing power is closely associated with the emerging branding power. There’s no doubt price gouging had been practices for thousands of year. However, price gouging is likely only practical with monopoly or in association of other power e.g. government, religion, etc.
No one accepts pricing gouging willingly, especially in today’s competitive market and government controlled anti-monopoly policy. Getting buyers willingly accept an above average cost-plus price is really the art of pricing power.
I was wondering when and how intense the society become interested in Pricing Power. The tool I found is Google’s Ngram viewer.
Google started digitizing published books since 2004. They have taken a subset of 5 million books (around 4 percent of all the books ever published) and trace the 500 billion or so unique words to create Ngram viewer. The Ngram viewer can offer a glimpse into the history and popularity of words and phrases over the years.
As the Ngram viewer takes case-sensitive phrases, I plugged in three variations of “Pricing Power”, “Pricing power” and “pricing power”, which represent occurrences in title, starting of a sentence and in sentence respectively. Here’s what it spit out.
“Pricing power” was first mentioned in 1900′s. It mostly disappeared for a period, and gained much popularity in 1960′s. The popularity didn’t last. Only in the late 1990′s, it found its way into our vocabulary in a big way. This seems to coincide with the internet and the digital economy boom.
Very interesting. Why did the popularity of the term rise and fall? Does essence of pricing power result from the digital economy? I’m afraid the Ngram chart brings more questions than answers.
“Pricing Power” is an economic term describing the ability of a company to influence or alter the market price of a good or service.
In a perfect market (where there are numerous small buyers and sellers who have access to information regarding availability, prices, and quality of goods being traded and all goods of a particular nature are homogeneous), all buyers and sellers have the zero market power. Each party has to accept the current market price without being able to exercise any control over it.
However in reality, some companies have varying degree of control over pricing based on their brand image, product differentiation and market ownership.
Warren Buffett told the Financial Crisis Inquiry Commission in an interview in February 2011:
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
Pricing Power is also referred to as “Market Power”.