Some Thoughts on Pricing Power

There are gaps worth noticing when it comes to pricing power.

Two Levels Deep

If your client’s clients don’t have pricing power, they will expect your client to help absorb their weakness. Your client’s client can’t capture value, so your client struggles to capture value. You can follow this weakness all the way through to your price.

Your client will likely expect you to help absorb their inherited weakness when it comes to pricing. Unless you find a way to create more value for your client in a way that allows them to create more value for their client or by helping them improve their profitability.

One Level Deep

Sometimes your client’s client has good pricing power. They can command a higher margin because they create and capture value. But they are tough negotiators, and they demand value or a lower price. If your client provides them with a high level of value, they get to capture value.

But if your client doesn’t create value and instead behaves like a commodity, they will take the business at a lower margin, and it’s likely they’ll expect you to do the same. Unless you can create more value for your client and help them to be more profitable.

Zero Levels Deep

In scenario 1, everyone has a weakness when it comes to pricing. The weakness is absorbed all the way down the line. In scenario 2, how much value you capture depends on how much value your client can create and capture. The stronger they are, the stronger you are. In both cases the only way to higher margins is to create more value and help your client do the same.

Let’s look at one more scenario.

Your client’s client has pricing power. Your client has pricing power, too. Because both of these facts are true, you aren’t inheriting anyone else’s pricing problems. You should be able to both create and capture value.

Unless it’s you. If you can’t capture value here, it’s likely that you aren’t creating it or that you aren’t doing enough to capture it. It’s easy to blame this on poor negotiation skills, but the perception of value, the most important factor in a negotiation starts long before you sit down at the bargaining table.

When it’s all said and done, the only thing you can do to capture more value is to create more value. Even if you are dealing with the unenviable and sticky challenge of inheriting someone else’s pricing problem.

Questions

How much does it matter how strong or weak your client’s clients are when it comes to pricing?

How important is it that your clients have pricing power?

Can you inherit a pricing power because you are deep in the value chain?

How do you increase or improve your pricing power when your clients are weak?