By Rich Bond
In the article “The Tide of Price Over Volume,” published by Corporate Finance Brief, Barry Ritholtz coins the term “greedflation.” (https://ritholtz.com/2023/04/price-over-volume/)
He maintains that many corporations feel they are in a place where they can ignore the elasticity of demand and keep raising prices, even if volumes slip. They are placing greed over reason.
His premise is an interesting one. I’ve found that companies usually tend to ignore pricing at their own peril. But during inflationary times, they rush to increase prices. I believe neither strategy maximizes profits.
A smart organization will monitor their prices and have a sense of how their customers view the value of their products and/or services. Over time, these companies can determine which of their products is a commodity and which ones are known for their unique value and can demand a higher price.
Increasing prices on commoditized products or services is difficult, unless competitors are also raising prices. Raising prices too much can result in volume losses, which more than offset the higher margins.
On products that have a solid value proposition, there is more room to increase prices, whether or not competitors are increasing theirs or the cost of production is increasing.
Let me share an example: One of my customers produced a proprietary meat packaging product line that created huge savings for retailers with centralized butchering operations. The savings for their retail customers far outstripped the cost of the packaging product, enabling my client to raise prices on a consistent basis. This pricing power led the company to realize ever-increasing profits.
What are your views on pricing power in today’s environment? Let’s start a conversation.