Mental Model: Understanding Value Creation, Pricing Power, Barriers to Entry

Here's my mental model for understanding how value creation, pricing power, barriers to entry and switching costs all come together.

VALUE CREATION:

Profit growth requires selling more, raising prices and cutting costs.

PRICING POWER:

Raising prices requires pricing power. Customers only put up with price hikes if there is no alternative (unique product), if the alternative is lower quality (superior product), if the alternative is a higher price (cheaper product) or if using the alternative is inconvenient (switching cost).

BARRIERS TO ENTRY:

There is only no alternative if companies can't replicate their competitors. Competitors can't replicate if they don't know how (knowledge barrier), don't have the capability (capability barrier), don't have the resource (resource barrier) or aren't allowed (IP barrier).

SWITCHING COST:

It may be inconvenient for a customer to switch products, if there is a loss of access to customised components, if there are compatability issues or if it involves breaking a long-term contract.

Image

Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.

Comments

We need your insight to fill this gap

Leave a comment

88

3

{"i18n":{"language":"en_US"},"detailType":1,"isChannel":false,"data":{"magic":2,"id":384245986402432,"tweetId":"384245986402432","gmtCreate":1734835168801,"gmtModify":1734835201248,"author":{"id":4120987054613802,"idStr":"4120987054613802","authorId":4120987054613802,"authorIdStr":"4120987054613802","name":"Long_Equity","avatar":"https://community-static.tradeup.com/news/43412c9581fc7eef840624d0829cb637","vip":8,"userType":8,"introduction":"Concentrated Global Equity Fund","boolIsFan":false,"boolIsHead":false,"crmLevel":1,"crmLevelSwitch":0,"individualDisplayBadges":[],"fanSize":1065,"starInvestorFlag":false},"themes":[],"images":[{"img":"https://community-static.tradeup.com/news/f440318472017b7a3157014d378dc0c8","width":"2030","height":"1145"}],"coverImages":[{"img":"https://community-static.tradeup.com/news/f440318472017b7a3157014d378dc0c8","width":"2030","height":"1145"}],"title":"Mental Model: Understanding Value Creation, Pricing Power, Barriers to Entry","html":"<html><head></head><body><p>Here's my mental model for understanding how value creation, pricing power, barriers to entry and switching costs all come together.</p><p><strong>VALUE CREATION:</strong> </p><p>Profit growth requires selling more, raising prices and cutting costs.</p><p><strong>PRICING POWER:</strong> </p><p>Raising prices requires pricing power. Customers only put up with price hikes if there is no alternative (unique product), if the alternative is lower quality (superior product), if the alternative is a higher price (cheaper product) or if using the alternative is inconvenient (switching cost).</p><p><strong>BARRIERS TO ENTRY:</strong> </p><p>There is only no alternative if companies can't replicate their competitors. Competitors can't replicate if they don't know how (knowledge barrier), don't have the capability (capability barrier), don't have the resource (resource barrier) or aren't allowed (IP barrier).</p><p><strong>SWITCHING COST:</strong></p><p>It may be inconvenient for a customer to switch products, if there is a loss of access to customised components, if there are compatability issues or if it involves breaking a long-term contract.</p><p class=\"t-img-caption\"><img alt=\"Image\" title=\"Image\" src=\"https://community-static.tradeup.com/news/f440318472017b7a3157014d378dc0c8\" tg-width=\"2030\" tg-height=\"1145\"><span>Image</span></p></body></html>","htmlText":"<html><head></head><body><p>Here's my mental model for understanding how value creation, pricing power, barriers to entry and switching costs all come together.</p><p><strong>VALUE CREATION:</strong> </p><p>Profit growth requires selling more, raising prices and cutting costs.</p><p><strong>PRICING POWER:</strong> </p><p>Raising prices requires pricing power. Customers only put up with price hikes if there is no alternative (unique product), if the alternative is lower quality (superior product), if the alternative is a higher price (cheaper product) or if using the alternative is inconvenient (switching cost).</p><p><strong>BARRIERS TO ENTRY:</strong> </p><p>There is only no alternative if companies can't replicate their competitors. Competitors can't replicate if they don't know how (knowledge barrier), don't have the capability (capability barrier), don't have the resource (resource barrier) or aren't allowed (IP barrier).</p><p><strong>SWITCHING COST:</strong></p><p>It may be inconvenient for a customer to switch products, if there is a loss of access to customised components, if there are compatability issues or if it involves breaking a long-term contract.</p><p class=\"t-img-caption\"><img alt=\"Image\" title=\"Image\" src=\"https://community-static.tradeup.com/news/f440318472017b7a3157014d378dc0c8\" tg-width=\"2030\" tg-height=\"1145\"><span>Image</span></p></body></html>","text":"Here's my mental model for understanding how value creation, pricing power, barriers to entry and switching costs all come together. VALUE CREATION: Profit growth requires selling more, raising prices and cutting costs. PRICING POWER: Raising prices requires pricing power. Customers only put up with price hikes if there is no alternative (unique product), if the alternative is lower quality (superior product), if the alternative is a higher price (cheaper product) or if using the alternative is inconvenient (switching cost). BARRIERS TO ENTRY: There is only no alternative if companies can't replicate their competitors. Competitors can't replicate if they don't know how (knowledge barrier), don't have the capability (capability barrier), don't have the resource (resource barrier) or aren't allowed (IP barrier). SWITCHING COST: It may be inconvenient for a customer to switch products, if there is a loss of access to customised components, if there are compatability issues or if it involves breaking a long-term contract. Image","highlighted":1,"essential":1,"paper":2,"likeSize":88,"commentSize":0,"repostSize":3,"favoriteSize":0,"link":"https://ttm.financial/post/384245986402432","repostId":0,"isVote":1,"tweetType":1,"viewCount":200,"commentLimit":10,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"symbols":["PW"],"verified":2,"subType":0,"readableState":1,"langContent":"EN","currentLanguage":"EN","warmUpFlag":false,"orderFlag":false,"shareable":true,"causeOfNotShareable":"","featuresForAnalytics":[],"commentAndTweetFlag":false,"andRepostAutoSelectedFlag":false,"upFlag":true,"length":884,"xxTargetLangEnum":"ORIG"},"commentList":[],"isCommentEnd":true,"isTiger":false,"isWeiXinMini":false,"url":"/m/post/384245986402432"}