Monday, December 12, 2005

Untapped Pricing Power - The Measure of a Great Business

We like buying businesses with some untapped pricing power. For example, when we bought See's for $25 million, I asked myself, ¡°If we raised prices by 10 cents per pound, would sales fall off a cliff?¡± The answer was obviously no. You can determine the strength of a business over time by the amount of agony they go through in raising prices.

A good example is newspapers. The local daily paper controlled the market and every year they raised the [advertising] rates and circulation prices - it was almost a big yawn. They didn't worry about losing big advertisers like Sears, JC Penney or Wal-Mart, or losing subscribers.
They increased prices whether the price of newsprint went up or down.

Now, they agonize over price increases because they worry about driving people to other mediums. That world has changed.

You can learn a lot about the durable economics of a business by watching price behavior. The beer industry is able to raise prices, but it's getting tougher.


Excerpt from "2005 Berkshire Hathaway Annual Meeting"

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