For firms that can expect to be negatively affected by tariffs due to a lack of pricing power, the mechanism of that impact depends on why they lack pricing power.
Likewise, the strategies for growing pricing power depend on why it is low.
A firm’s pricing power can be low for two reasons:
- The firm operates in a highly competitive industry, where lots of other firms make similar products
- Consumer demand for the products the firm makes is highly elastic — a small increase in prices sends consumers hunting for alternatives or cutting spending disproportionately
In some cases, firms operating in a highly competitive market can consider consolidation through mergers and acquisitions to address their lack of pricing power, but that possibility brings with it another set of risks and uncertainties that need to be addressed. In cases where consolidation is not a sensible approach, firms should instead focus on strategies that distinguish them from their competitors in the minds of the consumer. On the other hand, for firms facing highly elastic consumer demand, the strategies used to increase pricing power should focus more on product innovation — creating new products and features that consumers have to have and are willing to pay for.
There are two fundamental investments a firm can make to drive pricing power. These will help to offset the negative impacts of tariffs on profits in the short term. Beyond that, these steps will improve the strength of a firm’s top line more broadly, positioning the firm for sustainable growth into the future.
- Decrease your competition by setting yourself apart from your competitors
- Decrease consumer demand elasticity through innovation to better align your portfolio with what customers want
We recommend four foundational actions firms can take now to drive higher pricing power in the future:
1. Optimize your existing portfolio of products and services to align with consumer demand and differentiate yourself from competitors, focusing on:
- The features and characteristics of your individual products and services
- Your portfolio range of different products and services
- Your innovation pipeline
2. Optimize pricing across your portfolio of products and services, with a focus on:
- The prices of individual products and services
- How your offerings span different price tiers
- Promotion and discount mechanisms and strategies
3. Optimize your investment decisions going forward, focusing on driving pricing power across:
- Product markets
- Consumer groups
4. Optimize your allocation of resources and marketing investments to activate the strategies across:
- Different retailers
- Different channels
Taking the appropriate actions — now and in preparation for the future — requires a thorough understanding of the economic impact of the proposed tariffs on different industries, the competitive environment of those industries and multiple dimensions of consumer demand.