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Who has the power when it comes to pricing?
A wide-screen TV set that costs $2,000 in Canada typically retails for around $400 less in the USA. A two-year computer-service agreement priced at $199 in Canada costs only $169 in the USA. And the GM Yukon sport utility vehicle can be anything from $11,000 to $13,000 more expensive in Canada than the United States. Why do prices rise so steeply north of the 49th parallel?
Part of the reason, says Ian Gordon, in the September 2011 issue of Ivey Business Journal, is that property, labour and transport costs are higher in Canada than in the USA. In particular, Canada has fewer outlet centres - highly efficient and cost-effective bases for retailers - than the USA. Moreover, many US manufacturers operate Canadian subsidiaries, which represent an extra layer in the distribution channel that does not exist for US-made goods sold in the USA.
But these reasons do not entirely explain why a wide range of goods costs more in Canada than the USA. Put simply, companies have come to expect higher margins on their Canadian sales than those in the United States; the Canadian market, historically, has borne these higher prices.
There are signs, though, that this is changing as the economic environment worsens. First, increasing numbers of Canadians seem willing to head south into the USA to pick up a bargain, especially on 'big ticket' items. And secondly, with the growth of online shopping, Canadians are increasingly placing their orders directly with US suppliers rather than dealing with indigenous retailers.
These developments are likely, over time, to significantly weaken Canadian retailers' pricing power and help to standardize prices across the whole of North America.
In the October 2011 issue of Financial Management, Tim Cooper looks at the factors that affect pricing power across the world and examines how finance teams can maximize it even when consumers are feeling the pinch.
He highlights the case of luxury car-maker Porsche, which maintains profit margins of around 20% while competitors such as BMW are stuck at around 11%. Porsche engineers ask, early in the development of each new vehicle, whether customers will be willing to pay for a particular component. If not, they leave it out. Porsche engineers work closely with the company's marketers throughout the development process, so that the firm does not end up with an over-engineered or over-valued product.
Pharmaceutical companies similarly pay great attention to the potential profitability of a new drug throughout its development phase. Protected by patents, they avoid price wars and so have significant pricing power.
Tim Cooper contrasts these with the transport industry, where pricing power is much less because competition is stiff and firms are constantly trying to fill their networks.
The article recommends businesses to: focus on profit rather than volume or market share; try to avoid price wars; make pricing power a key performance indicator; invest in brand and value; improve pricing expertise in sales, marketing and management; and set high price-increase targets that take performance into account.
Tim Cooper quotes investment guru Warren Buffet as saying that he considers pricing power to be the single most important factor in evaluating a business. Firms with a product that stands out from the competition can set and hold their price and so avoid getting sucked into a price war that lowers profitability and damages the brand.