📖Warren Buffett

Pricing Power

🌿 Intermediate★★★★★

Pricing power is the single best indicator of a business's competitive strength.

💬

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.

— 2011 CNBC Interview，2011

🏠 Everyday Analogy

Just like how consumers still line up to buy Moutai even when its price increases. A company with genuine pricing power is akin to a time-honored brand with a secret recipe—even if it raises prices, customers remain loyal because they cannot find the same product elsewhere.

📖 Core Interpretation

Pricing power is the ultimate manifestation of a moat. Having pricing power means: customers rely on you, there are few substitutes, and the brand is strong.
💎 Key Insight：If a company can raise prices without losing customers, it has a genuine moat. Think Coca-Cola, Apple, or See's Candies. This power means the business can maintain margins through inflation, recessions, and competitive attacks. Before investing, test this: what would happen if the company raised prices 10% tomorrow?

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❓ Why It Matters

Companies without pricing power see their profits squeezed in an inflationary environment. Companies with pricing power can pass on cost increases to their customers.

🎯 How to Practice

Testing Pricing Power: Has the price increase over the past decade kept pace with inflation? Did customers leave after price hikes? Can competitors follow suit?

🎙️ Master's Voice

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.
See's Candies can raise prices every year because customers love the brand. Airlines can't raise prices because customers will switch for $5 savings. Apple can charge premium prices for iPhones. This pricing power reveals true competitive strength.

⚔️ Practical Guide

✅ Decision Checklist

  • Can this company raise prices without losing customers?
  • Has the company raised prices above inflation?
  • Do customers have alternatives?
  • Is the product a necessity or discretionary?

📋 Action Steps

  1. Study historical pricing trends
  2. Analyze customer price sensitivity
  3. Compare margins to competitors
  4. Monitor pricing power over time

🚨 Warning Signs

  • Competing primarily on price
  • Customers highly price-sensitive
  • Margins declining over time
  • Unable to pass on cost increases

⚠️ Common Pitfalls

✕Cheapness is competitiveness - consistently low prices often indicate a lack of a moat.
✕High gross margin reflects pricing power - While gross margin may stem from low costs, true pricing power lies in the ability to proactively raise prices.

📚 Case Studies

1
See's Candies (1972)
Price increases implemented nearly every year for 50 years
✨ Outcome：Customer loyalty remained unaffected, with gross profit margin exceeding 60%.
2
Coca-Cola (1988)
Brand premium enables it to sustain price increases.
✨ Outcome：Global consumers are willing to pay a premium for brands.
3
Airlines (2011)
Unable to differentiate, forced into price wars.
✨ Outcome：The industry has been operating on thin margins or even at a loss over the long term.

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