Pricing power

Definition

Whether the business can raise prices without losing the customers.

Why It Matters

It is the cheapest growth there is and among the first things to test, because a price rise falls almost whole to the bottom line while a volume rise brings costs along with it. What caps it is rarely the customer. It is a contract fixing the rate for a term, a payer or a franchisor setting the price, a legacy plan the seller never repriced, or a bid market where the next quote is a phone call away. Read three years of rate changes and who left after each one. An owner who has not moved prices since before the last round of wage inflation is not showing restraint, they are showing a business that cannot ask. And a seller who raised them the quarter before listing has already pulled the lever you were buying.

In numbers: A business doing $1.2M at a 12% net margin that raises prices 3% and loses no customers keeps another $36,000, which is a quarter more profit than it made before.