Continuing on from the first part of the “East, West, Forward.” series, “Western” business/ investing concepts has always enamoured the idea of Pricing Power, with some famed investors singling it out as the most important factor for a business to achieve success, especially during not-so-easy times.
If a business has pricing power, surely it can demand that its customers pay more even if there are no improvements – that they either take it or leave it? And wouldn’t investors love to invest in such businesses with so much muscling power? Think of all the fat profit margins and cash flowing into the coffers!
But what happens when this power is taken too far out, like in the case when certain pharmaceutical companies bought out other pharma businesses with exclusive patents and subsequently raised the prices of life-and-death drugs by 700% for patients dependent on them? Surely these pharma companies have very strong moat – people’s lives depend on them?! And yet, we saw the meltdown backlash from the patients, authorities, and investors, simply because the human beings discern the situation and did not like what these all meant.
The “Eastern” counterpart, on the other hand, emphasises the Value Virtue – that is, instead of simply charging customers more just because, this paradigm focuses on providing better services/ making more relevant products. They demand that they contribute more value to customers.
The interesting question here is when human beings sense that they are getting an honest good deal, will it make it easier for them to willingly pay more?
Suppose you are the customer in question, do you prefer companies that demand you pay more, or those that create a product you willingly pay more for?
An unfortunate live comparison might be the housing situation in Hong Kong – the property developers, having built their land bank over many years, one way or another, now have so much pricing power that they can influence how many residential units get introduced to the market at any time. Quite literally, their customers can only take it or leave it.
Interestingly, the property yield of residential properties are now priced at ~2% range, which in layman’s term means current unit buyers need 50 years of rental income to breakeven on their cost. Mind you, HK leases are now 60 years long…
Should investors see these businesses as having supreme pricing power and strong moats? Or might there be more pressure like what happened with the aforementioned pharma companies?
The combination of East and West, the way Forward, might be the answer to this conundrum, and Singapore’s public housing policies might be a good reference point in this case. Always leave something positive on the table for the other side instead of wanting to win it all.
Price is what you pay, value is what you get.
P.S. Have a listen to what PM Lee shares on the HK housing issue.
P.S. Payback.