Publications
Partners
Pricing power is a huge advantage for a company. However, pricing power can change over time.
I have written about this before and we’ve seen some great examples of pricing power (or the lack thereof) out of the US in recent weeks.
I want to delve into them and check in on local examples.Let’s start by talking about a company with no real pricing power: Tesla.
It’s announced plans to retrench some 7% of staff to try make its electric cars cheaper.
Tesla has been benefitting from a government subsidy on electric cars that is being phased out during 2019.
This will push the already top-end prices higher.
The company is also starting to see some significant competition from other vehicle manufacturers moving into electric vehicles and while having a high-priced product is great for margins and profits, consumers do shop around.
Tesla has a certain status that initially gave it pricing power, but as it moves into the mass market with the lower-priced Model 3, they need more than just status.
Reducing costs, and hence the sales price, in order to compete against other electric vehicles is going to be a challenge for the company as it tries to generate sustained profits.
On the other side of the equation is Netflix. Netflix has supreme pricing power.
It’s announced a price increase of $1 to $2 for its 58m US subscribers and so far the evidence suggests it will lose very few customers as a result of the increase.
The increase nets Netflix extra revenue of roughly $100m per month (over $1bn a year) and its cost base doesn’t directly increase at all, so it will all be available for spending on new shows (which is their real cost).
In time it will also hit a price ceiling, but for now the company has pricing power and is using it to boost revenue.
In the middle of the pricing power battle is Apple.
They have pushed their top of the range flagship iPhones to between $1 099 and $1 449 with the entry level XR at $750.
This puts them very much at the high end.
As I wrote in the previous edition of finweek (Understanding Apple’s life cycle, p.17), they are seeing sales growth slow.
They have used their pricing power to push prices as high as they can, and my sense is that they have now hit the price ceiling.
But what a ceiling! Apple makes the majority of profits in the mobile market despite selling fewer mobile phones than the competition – who all work on much slimmer margins.
The pricing power has run out at Apple, but not before they stretched it to gain maximum margins.
Let’s turn to our local market.
MultiChoice, owned by Naspers* and which lists in late February, is an example of pricing power that is being eroded.
At almost R1 000 per month, their top package is expensive.
And after years of no real competition (except their own lower-priced packages) we’ve now got online streaming as competition.
After decades of absolute pricing power, all that MultiChoice really has left is its sport offering that keeps a significant portion of users paying the high prices.
The risk here will be that it loses its sport offering.
We’re starting to see that in the US with ESPN offering an app and other US sport associations offering direct-to-consumer solutions.
Therefore, for now, they have fairly decent pricing power, but sport is the Achilles heel.
So not only is the level of pricing power important, but also ask where that power is and when will it start to fade?
I would suggest that all pricing power fades in time. The question an investor needs to ask is what stage of pricing power a company is at.
And to determine what the trajectory is.
*finweek is a publication of Media24, a subsidiary of Naspers.
This article originally appeared in the 7 February edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
