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Warren Buffett’s No. 1 Metric for Picking Winning Stocks (AAPL, CMG) | The Motley Fool

“The single most important decision in evaluating a business is pricing power. 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%, then you’ve got a terrible business.” 

Warren Buffett understands a thing or two about successful investing, and he says pricing power is the most important factor to consider when making investment decisions. Let’s look at why this is such a crucial aspect to keep in mind, analyzing examples from Apple (NASDAQ: AAPL  ) and Chipotle Mexican Grill (NYSE: CMG  ) , two companies delivering extraordinary performance for investors while flexing their pricing muscle.

The importance of pricing power

Pricing power is a company’s ability to raise prices without losing too much sales volume because of this increase. This factor has some clear advantages from a financial point of view, as higher prices usually mean bigger profit margins for the company and higher returns for investors in the long term.

Also, pricing power says a lot about a company’s competitive strengths. Competition tends to keep prices at bay. If a company raises prices too much, consumers will typically go for a competitor’s cheaper product. Businesses with superior pricing power are those with competitive differentiation, meaning that consumers find something unique or superior about that company and its products.

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Warren Buffett’s No. 1 Metric for Picking Winning Stocks (AAPL, CMG).

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