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If Starbucks raised the price of a cappuccino, sales most likely would not be affected. If your attorney raised his or her hourly rate, would you switch law firms?  If a company or service firm does not have pricing power, then its value is less than it should be. Here are a few ways to develop or increase pricing power:

  • producing a discernible branded product or service
  • innovating with patent production such as Apple’s i-Pod
  • providing such exceptional service that competitors are not able to replicate it

An interesting question for company management is – how should they set their prices?  Sometimes the answer is that management figures out at what price the item can be sold and then works their costs backward.  The more traditional way is to add up the cost of labor, material, and overhead plus an acceptable profit.  But times have changed, and in many cases, the power of pricing has moved from the producer to the customer.  Today, Wal-Mart tells most of their vendors what they will pay for certain items, and Ford tells their suppliers the same.  On that basis, many companies are beholden to the Wal-Marts and the Fords of the world and do not have the benefit of pricing power.

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