September 10, 2005

Pricing strenght - A key indicator of competitive advantage

I was reading an interview of warren buffett a few days back. He was asked on what kind of businesses he prefers. His replied the ones where he can increase the price of the product ahead of inflation (he gave the example of see's candies ). He also noted that one should avoid businesses where one has to pray before increasing the price by one cent (he gave the example of berskhire hathway - the textile company where they found it diffcult to increase prices )

The above comment got me thinking. Pricing strength of a business is a very powerful indicator of competitive advantage enjoyed by the business. Think of FMCG companies like HLL, P&G, marico . These companies have been able to increase their prices (although that ability has come down in recent past due to higher competition ). On the other end companies like steel , cement typically can increase prices only when there is supply shortage (which is only for a limited period of time)

I have found the above way of looking at a business a very powerful tool of checking if a business has enduring competitive advantage.

How about telecom companies or IT services companies ...their pricing ability does throws up interesting insights ..although i have not been able to come to a conclusion


George said...

I think that a company's ability to raise their prices without substantial impacts on sales is a strong indicator that they have a competitive advantage through branding or market power.

VIKAS KUKS said...

This is the most important factor for evaluating the business. Espically CAP is very important as i read through your given links and other papers. CAP i feel makes the major chunk of investment decision for value investing. As i read the CAP importance i struck through a company called Astral Ploytechnik. May be you are familier of this firm, but i found it to be somewhat promising on CAP front as it can over a long term generate good ROCE and equally mantaining a moderate growth rate with the helpof technology. What i dont know is if they would be able to make Astral as a brand to maintain good pricing power. It will only be possible through technological upgradation and best delivery chain network. What are your thought on this.