Pricing power allows businesses to price their product or services higher than the rate of inflation and that of the competitors without reduced sales. Pricing power can come from a few ways. A very high quality product. A patented efficiency or feature of convenience that competitors cannot match. Or when a business is operating as a monopoly and barrier for entry is quite high.
A key indicator of the strength of a business is its pricing power That said, it does not mean that if a business does not have good pricing power it is a bad business. However, the opposite has a much higher probability to hold true.
In some businesses untapped pricing power is a good indicator that it is mispriced by the market. To reach such a conclusion one must have an idea on the costs and margins of that particular business against the backdrop of it’s competitors.
High pricing power can materialize as high ROIC over the years. But keep in mind that, high ROIC can be a result of many other factors. Operating and gross margins also provide an indication of the pricing power a company has.