When operating in sectors typically known for high profitability, determining whether to increase prices in response to shrinking margins can be a delicate balancing act. It’s not a simple decision and requires a deep understanding of the competitive dynamics within your industry. Margins can differ drastically across fields—be it food and beverage, hospitality, or aviation—so improving them often requires more than just adjusting prices. It may demand a fundamental shift in how your business competes.
While analyzing competitors is a standard practice when setting prices, it only scratches the surface. A more strategic approach involves evaluating five key industry forces: supplier power, buyer leverage, product uniqueness, the threat of substitutes, and the impact of rivals and potential entrants.
1. Power of Suppliers
When your suppliers hold significant control, your pricing flexibility and profit margins can be severely restricted. Take the personal computing industry, for example. Companies like HP and Dell depend heavily on Intel for processors and Microsoft for operating systems. Because these suppliers dominate the market, hardware manufacturers have limited room to negotiate, which tightens their profit margins. One solution is to gain control over your supply chain. Netflix offers a successful case—by producing its own content, it not only enhances margins but also strengthens its position in negotiations.
2. Customer Leverage
If your customers have significant influence—especially if a few account for a large portion of your sales—raising prices becomes a challenge. This is particularly true when products are indistinct from competitors’. Buyers in this scenario can easily demand better terms or switch providers. However, if your product or service offers clear performance advantages, customers may be willing to pay more. For instance, in performance-driven industries like digital advertising, clients will often prioritize outcomes over price.
3. Product Differentiation
Markets with little product distinction tend to be price-driven. Airlines serve as a textbook case—many carriers offer similar routes and experiences, so customers often choose based on cost. However, some airlines, such as Singapore Airlines, have managed to stand out through high-end service offerings like top-tier meals, exclusive entertainment, and exceptional hospitality. This differentiation enables them to justify higher ticket prices and attract loyal customers.
4. Threat of Substitutes
It’s important to assess not just direct competitors but also alternatives that could fulfill the same customer need differently. Substitutes such as video conferencing replacing travel, or plastic replacing aluminum, can alter market dynamics quickly. Technological advancements are a common driver. For example, Netflix significantly reduced the appeal of traditional movie theaters, while simultaneously increasing demand for premium home entertainment equipment like high-definition TVs.
5. Competition and Market Entrants
Although the threat from existing rivals and newcomers is significant, focusing too much on them—especially through aggressive price competition—can backfire. Price wars often reduce industry-wide profitability. Instead, it may be more productive to find common ground with competitors. In some cases, alliances or standard-setting agreements can strengthen the entire industry against pressure from suppliers, buyers, or substitutes.
Final Thoughts
Making the right pricing decision when margins are thin calls for a broad view of your industry’s structural forces. By carefully examining these five forces, businesses can uncover strategic opportunities to improve profitability without resorting to blunt price increases. For a more in-depth exploration of these ideas, Michael Porter’s classic Harvard Business Review article on competitive forces remains a valuable resource.
Ted is the co-founder of Ice Cube Marketing, a digital marketing agency in Singapore that has been operating since 2015 and has helped more than 500 SMEs grow their business through Facebook and Google ads.
