How I Think About Pricing Power When Buying a Business

When I evaluate a business for acquisition, one of the most important but often misunderstood concepts I study is pricing power. Over the years, I’ve learned that pricing power is more than just the ability to raise prices; it’s a measure of how much customers value the product or service and how much flexibility the company has to capture that value.

Businesses with strong pricing power are resilient. They can pass along cost increases, maintain margins, and invest in growth. Businesses with weak pricing power are fragile. Even small cost increases can crush profitability because customers leave at the first sign of a price change.

I’ve made mistakes ignoring this factor, and I now treat pricing power as a critical component of due diligence.

Why Pricing Power Matters

Pricing power matters because it directly affects:

• Profit margins and sustainability
• Customer loyalty and retention
• Competitive positioning
• Valuation multiples
• Resilience to inflation and cost swings

In short, businesses with pricing power are worth more.

My Early Mistakes

In one deal, I underestimated how price-sensitive customers were. The company looked profitable on paper, but its margins were thin, and every small increase triggered complaints and churn.

In another case, I assumed a niche service had strong pricing power. Instead, I discovered customers viewed it as a commodity and constantly shopped for lower bids.

Both mistakes taught me that pricing power isn’t about what I think, it’s about what customers actually do when prices change.

How I Evaluate Pricing Power

When I review a business, I ask:

• Have prices increased in the past three years, and how did customers react?
• Are competitors cheaper, and do customers switch easily?
• What makes the company unique enough to justify higher prices?
• Are margins stable or shrinking under pressure?
• How often do customers negotiate discounts?

I also look at customer contracts to see whether pricing flexibility exists.

Signs of Strong Pricing Power

• Customers stay loyal despite price increases
• Products or services are differentiated by quality or reliability
• The company has a strong brand reputation
• Competitors struggle to match value
• Margins remain stable over time

Signs of Weak Pricing Power

• Customers leave quickly if competitors lower prices
• Services are commoditized with little differentiation
• Margins shrink as costs rise
• Discounts are common just to close deals
• Sellers avoid raising prices for fear of churn

How I Strengthen Pricing Power Post-Acquisition

After I buy a business, I often strengthen pricing power by:

• Improving service quality so customers value the relationship more
• Building brand reputation to command trust
• Segmenting customers and offering tiered pricing
• Packaging services to reduce direct comparison to competitors
• Testing small, incremental increases to measure elasticity

Why Pricing Power Impacts Valuation

Pricing power increases transferable value. Buyers like me pay more for businesses that can raise prices without losing customers. Weak pricing power lowers valuation because future profitability is uncertain.

Final Thoughts

I’ve learned that pricing power is one of the most important indicators of resilience and value. That’s why I test it carefully during diligence and work to strengthen it post-acquisition.

Because at the end of the day, profitability isn’t just about costs, it’s about the ability to capture value from customers who see the business as indispensable.

I continue sharing my acquisition frameworks and lessons at DrConnorRobertson.com, where I document the real playbook I use to evaluate and grow businesses.