Term · Business Model & Operating KPIs
Pricing Power
In briefPricing power is the ability to raise prices or improve terms without losing an excessive amount of volume, customers or market share. It protects margins during inflationary phases and often points to differentiation, switching costs or scarce capacity.
Definition
Pricing power is the ability to raise prices or improve terms without disproportionately losing volume, customers or market share.
How it is calculated
Formula. No standardised metric. Indications come from price-mix effects, gross margin, contract clauses, churn and market shares.
Why it matters for small caps
It protects margins during inflation and can be a sign of differentiation, switching costs or scarce capacity.
Common misreadings
- Price increases alone do not prove pricing power. Volume declines, discounts, a worse mix and delayed cost inflation must be taken into account.
In the process
Frequently asked
What is pricing power?
It is a company's ability to push through higher prices without losing meaningful demand. It is a sign of economic strength.
How can you recognise pricing power?
Indications come from price-mix effects, a stable or rising gross margin, contract clauses, low churn and market shares. There is no standardised metric.
Why do price increases alone not prove pricing power?
Volume declines, discounts or a worse mix can consume the effect. Only when prices rise without a loss of demand is there genuine pricing power.
Related terms
Sources
Primary
NYU Stern – Aswath Damodaran, Valuation Resources
https://pages.stern.nyu.edu/\~adamodar/
https://pages.stern.nyu.edu/\~adamodar/
Methodology
ESMA – Guidelines on Alternative Performance Measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
https://www.esma.europa.eu/document/esma-guidelines-alternative-performance-measures
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.