Ability to Raise Prices

Warren Buffett sat in front of the Financial Crisis Inquiry Commission in 2010 and reduced decades of investment philosophy to a single sentence: "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 a tenth of a cent, then you've got a terrible business." He wasn't being theoretical. Berkshire Hathaway's portfolio — See's Candies, Coca-Cola, Apple, American Express — reads like a catalogue of companies that have raised prices for decades without losing customers. The concept is deceptively simple: can you charge more tomorrow than you charge today, and will your customers stay?

The test is binary. Either your customers absorb the price increase or they leave. Hermès raises the price of a Birkin bag by 5–7% every year — and the waiting list grows longer. The bag retailed for roughly $7,000 in 2010 and exceeds $11,000 today. Demand did not soften. It intensified. Hermès's operating margin sits above 40%, roughly double the luxury industry average, because the company possesses pricing power so absolute that increases function as marketing: a higher price signals greater exclusivity, which increases desire, which absorbs the next increase. The secondary market confirms the dynamic — Birkins routinely resell for 1.5–2x retail, meaning Hermès's customers perceive the listed price as a discount from true market value.

Contrast that with a regional airline raising fares by $15 on a competitive route. Half the passengers check Kayak, find a cheaper option, and rebook. Same action — raising prices — opposite outcome. The difference is not the size of the increase. It is the structural position of the business.

Apple demonstrated this over an entire product lifecycle. The original iPhone launched at $499 in 2007, and Steve Jobs cut the price to $399 within three months after slow initial sales. That was a company without pricing power — yet. Over the next fifteen years, as the ecosystem deepened and switching costs compounded, Apple's average selling price climbed from roughly $600 in 2012 to over $800 by 2022, peaking above $900 with the iPhone Pro Max lines. Apple didn't just raise prices. It created new price tiers — the Pro, the Pro Max, the Ultra — that gave customers permission to spend more without feeling they were paying more for the same thing. Unit sales plateaued after 2015. Revenue kept climbing. That gap between flat volume and rising revenue is the financial signature of pricing power.

Costco occupies the opposite end of the aesthetic spectrum but the same structural category. The company has raised its membership fee seven times since 1983 — from $25 to $75 — and the renewal rate has never dipped below 90%. In 2024, Costco raised the annual fee to $75 from $65 for Gold Star members and $130 from $120 for Executive members, the first increase in seven years. The stock rose on the announcement. Wall Street understood what the renewal rate already proved: Costco's members absorb price increases because the perceived value of the membership vastly exceeds the fee. The ability to raise that fee — predictably, repeatedly, without defection — is worth more to investors than any single quarter's revenue figure.