How I Approach Pricing Power When Evaluating a Business

When I’m evaluating a business to buy, one of the most important questions I ask myself is: Does this company have real pricing power?

At first, I used to overlook this. I focused on revenue, margins, and growth potential. But over time, I realized that pricing power, the ability to raise prices without losing customers, is one of the purest indicators of a business’s strength. A company with pricing power has resilience. It can protect margins, absorb inflation, and adapt to competitive pressure. A company without pricing power is fragile, no matter how good its financials look on paper.

In this article, I’ll explain how I think about pricing power, how I test for it during diligence, and the lessons I’ve learned from both strong and weak examples in businesses I’ve reviewed.

Why Pricing Power Matters

Pricing power matters because it goes straight to the heart of profitability and defensibility. If a business can raise prices and customers stay, that means:

• Customers see the company as irreplaceable.
• The business isn’t stuck in a race to the bottom.
• Margins are sustainable even in tough markets.

Without pricing power, businesses become commodities. They’re forced to compete on cost, and that’s a dangerous place to live.

My First Wake-Up Call

In one of my early acquisitions, the company had healthy margins but only because the previous owner had been terrified to raise prices. When I tested a small increase, customers pushed back aggressively. I realized the business was far more fragile than it looked. It didn’t have pricing power; it had been underpriced.

That experience taught me to test for pricing power before closing, not after.

How I Test for Pricing Power

When I’m evaluating a company, I look for several indicators of pricing power:

1. Customer Loyalty

Do customers buy because of price or because of value? If it’s just price, the business has no moat. If it’s value, quality, service, or relationships, that’s a sign of pricing power.

2. Historical Price Changes

Has the company raised prices in the past? How did customers react? If the business has successfully raised prices without churn, I see strength.

3. Gross Margin Trends

Healthy, stable margins indicate that the company isn’t constantly squeezed by competitors. Declining margins suggest weak pricing power.

4. Competitor Positioning

If competitors are undercutting heavily, but customers stay loyal to this business, that’s a strong signal.

5. Customer Conversations

When I talk to customers during diligence, I ask what they value most. If they emphasize reliability, quality, or relationships over cost, I know pricing power is present.

Signs a Business Lacks Pricing Power

On the flip side, I’ve learned to recognize red flags that signal weak pricing power:

• Customers frequently shop around for better deals.
• Revenue depends on bidding wars with razor-thin margins.
• The company has never raised prices, even as costs have increased.
• Salespeople admit they win deals mostly on price.

These businesses may look fine today, but they’re highly exposed to inflation and competition.

Why Pricing Power Impacts Valuation

Pricing power directly affects valuation. A company with strong pricing power can command higher multiples because its future cash flow is more secure. A business without it deserves a discount because it’s riskier.

That’s why I study it so closely. I don’t want to pay a premium for a company that’s secretly built on fragile customer relationships.

How I Protect Myself

If I find a company with weak pricing power but still want to buy it, I structure the deal carefully:

• Lower the purchase price to reflect risk.
• Tie earnouts to margin stability, not just revenue.
• Plan immediate pricing experiments post-close to test elasticity.

But more often than not, I’d rather walk away from a weak-pricing-power business and wait for one with stronger fundamentals.

Mistakes I’ve Made

I’ve made mistakes by assuming pricing power existed without testing it. In one deal, I thought the company’s loyal customer base meant strength. But when I tried modest price increases, I discovered loyalty was really just convenience; customers left as soon as they saw a cheaper alternative.

I’ve also underestimated the pricing power of niche businesses. Once, I assumed a company would be exposed to competition, but it turned out customers valued its unique process so much that price barely mattered. That mistake taught me not to overlook hidden moats.

Why Pricing Power Reveals True Strength

Pricing power is more than a financial concept; it’s the ultimate stress test. It reveals whether customers buy because they truly value the business or because it’s simply cheap and available.

If the company can raise prices and keep customers, I know I’m buying something defensible. If not, I know the risk is far higher than the numbers suggest.

Final Thoughts

I’ve learned that pricing power is one of the most important factors in evaluating a business. It determines resilience, protects margins, and increases valuation. A business with pricing power is one I can grow confidently. A business without it is one I approach with extreme caution.

That’s why, today, I always test for pricing power before closing. It’s not about squeezing customers, it’s about making sure I’m buying a business with real strength, not a fragile commodity.

I continue sharing my frameworks for acquisitions, private equity, and real estate strategy at DrConnorRobertson.com, where I document the lessons I’ve learned through experience.