Brands, trust and pricing power
A brand is an advantage only if it lets a firm charge more, or sell more, than its costs explain. How to test pricing power with numbers, and why trust matters most when quality is hard to check.
Key takeaways
- Pricing power is the ability to raise prices without losing many customers.
- Hermès, the French luxury goods maker, reported 2025 revenue of EUR 16,002 million and cost of sales of EUR 4,623 million, so it kept about 71 cents of every euro of sales after the direct cost of what it sold.
- Common mistakes: Treating awareness as advantage: everyone knowing a name does not mean anyone pays more for it.
Key idea
Pricing power is the ability to raise prices without losing many customers. A brand creates it when buyers trust it to deliver something they value and cannot easily get elsewhere. Fame alone is not enough: the test is a price premium, or a sales advantage, that covers the cost of building the brand and lasts.
What a brand does, economically
- It saves the buyer effort: a trusted name replaces hours of checking quality.
- It lowers the buyer's risk: when quality is hard to judge before buying (food safety, medicine, a bank, a school), people pay more for a name they trust.
- It signals something about the buyer: for luxury goods the price and the name are part of what is bought.
- It costs money to build and keep: advertising, quality control, and saying no to cheap deals that would weaken it.
Worked case
Testing pricing power: a 10 percent price rise
The prompt
Illustrative numbers, fictional companies. Two juice makers in Saudi Arabia each spend SAR 2.00 to make and deliver a bottle. The branded one sells at SAR 3.20 and spends SAR 0.30 a bottle on marketing. The unbranded one sells at SAR 2.50 with no marketing. Both raise prices by 10 percent. The branded maker loses 4 percent of its volume; the unbranded maker loses 40 percent. What happens to profit per 100 bottles they sold before?
The structure
- Profit = bottles sold x (price minus cost per bottle)
- Margin per bottle before and after the price rise
- Volume after the price rise
Working it through
1. Branded margin today
SAR 3.20 minus SAR 2.00 of product minus SAR 0.30 of marketing.
Branded margin (SAR per bottle):3.2 - 2 - 0.3 = 0.92. Unbranded margin today
SAR 2.50 minus SAR 2.00.
Unbranded margin (SAR per bottle):2.5 - 2 = 0.53. Branded after the rise
Price SAR 3.52, so a margin of SAR 1.22, on 96 bottles instead of 100.
Branded profit per 100 bottles before (SAR):96 × (3.2 × 1.1 - 2 - 0.3) = 1174. Unbranded after the rise
Price SAR 2.75, a margin of SAR 0.75, on 60 bottles.
Unbranded profit per 100 bottles before (SAR):60 × (2.5 × 1.1 - 2) = 455. Branded profit change
From SAR 90 to SAR 117.12.
Branded profit change (percent):(117.12 - 90) ÷ 90 × 100 = 30.136. Unbranded profit change
From SAR 50 to SAR 45.
Unbranded profit change (percent):(45 - 50) ÷ 50 × 100 = -10
The recommendation
The same 10 percent price rise lifts the branded maker's profit by about 30 percent and cuts the unbranded maker's profit by 10 percent. That difference is pricing power, and it is what the brand's SAR 0.30 a bottle of marketing buys. The unbranded maker has no pricing power: its buyers move to the next cheapest juice. So in a case, test a brand with one question: what happens to volume when the price goes up?
Risks: Volume responses are estimates; test them with a small trial in a few stores first; Repeated price rises can use up goodwill that took years to build.
Hermès, the French luxury goods maker, reported 2025 revenue of EUR 16,002 million and cost of sales of EUR 4,623 million, so it kept about 71 cents of every euro of sales after the direct cost of what it sold. Its recurring operating income was EUR 6.6 billion, 41 percent of sales. Margins like that, held year after year, are what pricing power looks like in the accounts: buyers pay far more than the cost of the materials and the work because of what the name means to them.
Hermès reported 2025 revenue of EUR 16,002 million and cost of sales of EUR 4,623 million. What was its gross margin, in percent? Round to one decimal.
How brands lose their power
- Constant discounting teaches buyers that the full price is optional.
- A quality or safety failure breaks the trust the brand was selling.
- Better information: when reviews, tests and price comparison make quality easy to check, the trust premium shrinks and the product moves towards a commodity (a product bought on price alone).
- Stretching the name over products that do not deliver the same promise.
Treating awareness as advantage: everyone knowing a name does not mean anyone pays more for it. Ignoring the cost of the brand: a premium that only covers the marketing creates no value. Judging pricing power from price alone, without the volume response.
Where does a trusted brand usually add the most pricing power?
A company raises prices 5 percent and loses 20 percent of its volume. What does that suggest?
Sources, checked on 2026-10-01. Company figures are from the company's own reports or filings; per-unit figures and comparisons are our arithmetic on them.
- Hermès International, 2025 full-year results press release, 12 February 2026 (regulated release, consolidated income statement): https://mfn.se/all/a/hermes/hermes-international-2025-full-year-results-a01f2a5e
Sources for this lesson (2)
- Recognized public explanations of case-interview concepts and terms
- Hermès International, 2025 full-year results press release, 12 February 2026 (regulated release, consolidated income statement)
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