Understanding the Intrinsic Link Between Economic Value and Price

27 September, 2017

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As Warren Buffet once told the Financial Crisis Inquiry Commission, "If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business."

That concept is the basis for understanding the link between economic value and price. Another term for economic value, which we will use throughout this post, is "pricing power." What's the link, then, between pricing power and price?

Economic Value is Freedom

Economic value is what gives a retailer the ability to raise prices with a negligible effect on volume. In order to attain that value, all other cylinders of the business must be firing — constantly. In fuel and convenience retail, those cylinders include the main volume magnets: market, location, facilities, operations, merchandising and brand.

What does your price look like if you are failing in these other areas? Constrained, at best. If you are in a terrible, failing market, have an unfortunate site location with little traffic or too much competition, your brand is undeveloped and/or inconsistent, your facilities need attention and your customer service offering is lacking, you have not earned the right to price as you choose. If even one of the six volume magnets is faltering, you may give up that right, and be forced to price too low, sacrificing margin.

However, if the opposite is true — your location is a destination, your traffic is high, your facilities are brilliantly clean and customer-friendly, your brand is highly developed and well-known — then you can price with power. You have achieved economic value beyond price, and are now able to adjust your price without sacrificing volume or sacrificing customers to your competitor. In other words, you are what Buffet calls "a very good business."

As you can see, economic value in pricing power is freedom. When you have all of your retail ducks in a row, you have the value, power and freedom to price as you choose. Of course, there's a relationship between your ability to price fuel and the current state of market maturity and regulation in your geographic area. But your focus on attaining pricing power via excellence in the volume magnets should remain regardless of whether or not your market has matured to the point of deregulation.

If you are interested in further exploring the 7 Elements for Fuel and Convenience Retail Success, contact a Kalibrate Strategy Specialist.

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