The Pricing Power Test
Raise the price and watch whether the customer even notices.
- Difficulty
- Moderate
- Time to result
- ~months to results
- Steps
- 6
- Confidence
- 62%
Munger's test is empirical rather than theoretical: move the price and observe. See's Candies was bought for twenty million dollars, and Berkshire found quickly it could raise prices about ten percent a year with nobody caring. Volume did not grow; profit did. Crucially the extra profit required almost no new capital, so it fell straight through. The second half of the test is diagnostic: locate the specific thing the customer trusts. Heinz holds price because of a flavour on a fried potato that people will change brands over, while Kraft cheese triggers a rebellion at the same move, even under one owner. The same logic explains sauces protected by trade secrets, Coca-Cola, and Hermes, whose brand took centuries and eight generations of daily policy work. Munger's caveat is that the rare business passing this test is almost never available cheaply.
Origin
Extracted from Acquired, where Charlie Munger explained why See's Candies, Heinz, Coca-Cola and Hermes hold price while Kraft cheese and style-driven brands do not.
Core principles
- 01Fame is not pricing power; only price rises absorbed without complaint are.
- 02Real pricing power converts straight to profit because it needs no new capital.
- 03Trust in a specific sensory experience is harder to imitate than a logo.
- 04Pricing power is category-specific, not company-specific.
- 05Finding the rare business with it is easier than getting the chance to buy it cheaply.
How to run it
- 1
Move the price and measure volume
Apply a modest price increase and track units sold rather than customer sentiment. The signal Munger looked for at See's was that nobody cared.
Pro tip Run it as a real increase in a real market; survey intent to pay is close to worthless here.
- 2
Repeat it over years
One absorbed increase can be noise. Berkshire raised See's prices roughly ten percent every year for four decades, which is what turned an observation into evidence.
Watch out A brand can absorb one rise and then break; do not size a position on a single data point.
- 3
Check what the extra profit costs you
Confirm the higher price needs no new plant, inventory or headcount. See's ended forty years with the same two kitchens and a bunch of retail stores it started with, which is why the pricing power showed up as profit.
Pro tip Pricing power funded by rising capital intensity is a treadmill, not a moat.
- 4
Name the thing the customer trusts
Identify the concrete source of the trust: an inimitable flavour, a trade secret, a reputation built over generations. If you cannot name it, you are looking at awareness rather than power.
Pro tip Trade-secret flavour profiles are unusually durable; Munger cited a single operator controlling most sauces in Korea.
- 5
Test brand by brand, not company by company
Run the test on each brand independently. Munger's Kraft Heinz example shows two brands under one roof with opposite results: Heinz takes price, Kraft cheese cannot.
Watch out Portfolio-level pricing statistics hide exactly the difference you are trying to find.
- 6
Wait for a price you can actually pay
Munger's practical caveat is that the chance of buying one of these businesses cheaply is so low he would not even look most of the time. The whole trick is catching them on the rare occasion they are cheap.
Pro tip Keep a short list of businesses that already passed the test, and act only on price.
In the wild
Berkshire bought See's Candies for twenty million dollars, its first acquisition, at a point when the business was earning only about four million pre-tax and the family needed liquidity to pay death taxes. Munger said they found out fairly quickly that they could raise the price roughly ten percent every year and nobody cared. Volumes did not rise; profits did. Because the business needed almost no new capital, that price increase went straight through. Forty years later, Munger noted, it still had two big kitchens and a bunch of retail stores, exactly as when they bought it.
→ Decades of compounding profit growth from price alone, with essentially no reinvestment required.
Munger contrasted two brands inside the same company. Ketchup on a fried potato has a flavour people will switch brands over, so the price of Heinz can be raised fairly freely. Try the same with Kraft cheese and, in his words, everybody goes into rebellion, including the final customer at home, because they do not much care whether the cheese is Kraft. The diagnostic difference is not marketing spend or brand recognition; it is whether a specific, hard-to-imitate sensory experience is doing the work.
→ A clean rule for separating brands that own their category from brands that merely occupy shelf space.
Common mistakes
Treating fame as pricing power
Well-known packaged goods brands often earn only two or three points above average. Recognition and the ability to raise price without losing customers are different properties.
Ignoring what the increase costs in capital
If holding the higher price requires more plant, inventory or promotion, the profit never reaches the owner. The See's result depended on the business needing essentially no new capital.
Running the test where low price is the promise
In a business whose whole reputation is being cheapest, a price rise destroys the asset you were measuring. The Costco hot dog is the standing example of a price deliberately left alone.
Is it for you?
Best for
Consumer businesses and their investors trying to tell a genuine pricing moat from mere brand awareness.
Not ideal for
Businesses whose entire promise is the lowest price, where the test itself destroys the asset.
From the transcript
“And we found out fairly quickly that we could raise the price every year by 10% and nobody cared.”
“Hey, but you try to raise the price of Kraft cheese and everybody goes in a rebellion.”
“Well, they just got a brand people trust so much.”
From the episode
Charlie Munger
Charlie Munger