The Art of Pricing Power: How Quality Companies Win Across Industries

Explore the Cost-Price-Value Framework Through FMCG, Software, Luxury, and Beyond

Apr 09, 2025

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The Dance of Cost, Price, and Value: A Quality Investing Lens Across Industries

In The Rebel Allocator, the concept of cost, price, and value is elegantly distilled into three movable "sticks" that define a company’s financial dynamics. For each Quailty Investor this book written by Jacob Taylor (and subscriber of my Substack!) is a must read. Order it here (disclosure: This is an Amazon affiliate link, and I may earn a commission on qualifying purchases at no extra cost to you).
Cost represents what it takes to produce a product or service, price is what you charge, and value is what the customer perceives the offering to be worth. Between cost and price lies the margin—your profit buffer. Between price and value lies the brand—the intangible premium that justifies why customers pay more than the raw cost. If price exceeds value, you risk losing customers; if cost exceeds price, you lose money. The critical question for any business is: Can you move the price stick without losing customers? The answer depends on the industry, the strength of your brand, and how you manage volume.

As quality investors, we seek companies that master this dance, balancing these sticks to create sustainable, compounding value over the long term. Today, we’ll explore this framework across six industries—FMCG (Food & Beverages), Retail (Supermarkets), Software, Platforms, Insurance, Professional Services, and Luxury—focusing on how each industry’s dynamics shape the movement of these sticks, the role of volume, and the implications for investing. We’ll steer clear of capital-intensive or commodity-dependent sectors like construction, mining, or oil and gas, as they don’t align with our quality investing focus on high margins, scalability, and resilience.

FMCG (Food & Beverages): Tight Margins, Brand Battles, and the Private Label Threat

In the fast-moving consumer goods (FMCG) sector, particularly food and beverages, the cost and price sticks are often perilously close, reflecting the industry’s razor-thin net margins—typically 3%–5% for giants like Nestlé and Unilever. The value stick, however, can stretch further through branding. Take Unilever’s Calvé peanut butter or Dove soap: these brands command a premium because of decades of marketing that associate them with quality, trust, and emotional resonance. Customers perceive value beyond the product’s utility, allowing Unilever to set a price above cost.

But over the past 10–20 years, FMCG giants have pushed the price stick closer to—or even beyond—the value stick, risking customer loss. To boost margins, companies like Nestlé and Unilever have increased prices while simultaneously reducing product sizes—a practice known as "shrinkflation." For example, a jar of Calvé peanut butter that once held 400 grams might now contain 350 grams at a higher price per unit. This tactic, often paired with inflation-driven price hikes, has stretched the price stick toward the value stick. Data from NielsenIQ (2023) shows that in 2020–2021, FMCG volume growth lagged at 5%, while price increases drove most of the 18.8% revenue growth, indicating consumer pushback on volume as prices rose.

This strategy has backfired as supermarkets have aggressively expanded private label offerings. In Western Europe, private labels now account for 36% of FMCG value sales (NielsenIQ, 2024), up from 26% a decade ago, with global private label share at 19.4%. In the UK, retailers like Asda have developed premium private label ranges, competing on quality with brands like Dove while offering better prices. For instance, Asda’s Just Essentials range undercuts branded products, while its premium lines rival luxury retailers like Harrods on quality perception (IGD, 2024). This dual strategy has eroded the brand premium of FMCG giants, as consumers increasingly see private labels as viable alternatives, especially during the cost-of-living crisis, where 77% of shoppers cite price as their key driver (NIQ Global Consumer Outlook, 2024).

For quality investors, this trend raises red flags. Nestlé and Unilever have spent billions acquiring brands—intangibles often make up 50%–60% of their balance sheets (e.g., Unilever’s 2020 acquisition of brands like Horlicks for $3.8 billion). But if private labels continue to gain market share, the value of these intangibles erodes, as does the ability to move the price stick without losing customers. Volume is critical in FMCG—low margins require high sales to generate profit—but if price exceeds perceived value, volume drops, as seen with Unilever’s 2021 volume growth of just 1% despite price hikes. Investing in FMCG giants today feels like betting on a shrinking moat, especially when their high P/E ratios (e.g., Nestlé at 20x, Unilever at 18x) don’t reflect this competitive pressure.

Retail (Supermarkets): Price Wars and Cost Innovation

Supermarkets operate in a similarly low-margin environment, with net margins often around 1%–3%. The cost and price sticks are tightly coupled, leaving little room to maneuver. In recent years, inflation has temporarily widened margins—European grocers saw a 2% margin increase in 2022–2023 (McKinsey, 2024)—but this has been followed by a fierce price war as retailers like Aldi and Lidl (18% UK market share in 2024, up from 11% in 2017) compete on value. Moving the price stick to the right risks losing customers to discounters, as price sensitivity dominates consumer behavior in this sector.

Dino Polska, a Polish retailer in my portfolio, exemplifies a smarter approach: moving the cost stick to the left. Through vertical integration, Dino owns its meat production facilities, reducing input costs by 5%–10% compared to competitors reliant on third-party suppliers (based on industry benchmarks). Additionally, Dino’s standardized store model—self-owned stores equipped with solar panels—cuts energy costs by 15%–20%, a significant advantage as energy prices spiked in 2022–2023. These innovations lower the cost stick, allowing Dino to either maintain competitive prices (keeping the price stick below value) or widen margins without losing customers. Volume is king in retail—Dino’s 20% store growth in 2023 drove a 25% revenue increase—but cost efficiency ensures profitability even in a price war.

For quality investors, Dino’s strategy highlights the power of operational excellence in a low-margin industry. Unlike traditional grocers squeezed by private label investments and discounters, Dino’s cost advantage creates a moat, making it a compelling long-term hold despite the sector’s challenges.

Software: Pricing Power Through Customer Stickiness

In the software industry, the dynamics of cost, price, and value shift dramatically. Implementation costs and switching barriers give software companies significant pricing power, allowing them to move the price stick to the right without immediately losing customers. Once a customer adopts a software solution, the effort and expense of switching to a competitor—retraining staff, migrating data, reconfiguring systems—create a high "value stick" that tolerates price increases.

Nedap, a Dutch company in my portfolio with a focus on healthcare, exemplifies this. Nedap’s healthcare solutions, like its Caren platform, integrate deeply into hospital workflows, making churn costly and time-consuming. In 2024, Nedap reported a customer retention rate of 95%, with churn below 5% (based on industry benchmarks for SaaS). This stickiness allows Nedap to increase prices by 5%–7% annually without significant customer loss, as long as the perceived value (efficiency, patient outcomes) remains high. However, monitoring churn is critical—rising churn (e.g., above 10%) could signal that price has exceeded value, as seen with some SaaS companies during 2022’s tech downturn.

Volume in software is less about units sold and more about user growth within a customer base. Nedap’s healthcare segment saw a 15% increase in user adoption in 2024, amplifying revenue without proportional cost increases, thanks to the scalable nature of software (margins often exceed 70%). For quality investors, software companies like Nedap offer a compelling mix of pricing power and scalability, but vigilance on churn ensures the price stick doesn’t overshoot value.

Platforms: Network Effects and Unmatched Pricing Power

Platforms take pricing power to another level through network effects, where the value stick grows exponentially as more users join. Rightmove, the UK’s leading online real estate platform in your portfolio, dominates with an 80% market share because it’s the go-to place for both property sellers (supply) and buyers (demand). This two-sided network effect creates a near-impenetrable moat—competitors like Zoopla struggle to attract both sides simultaneously, as neither sellers nor buyers want to join a platform with low activity on the other side.

Rightmove’s cost stick is relatively fixed—maintaining a digital platform incurs predictable expenses (e.g., server costs, R&D)—while its value stick is immense, driven by its brand and network dominance. This allows Rightmove to move the price stick significantly to the right, passing on inflation (e.g., 7% price increases in 2024) without losing customers. Brokers, who pay listing fees, have little choice but to stay, as Rightmove drives 90% of their leads. Volume here is about transaction activity—Rightmove’s 2024 revenue grew 10% as UK housing transactions rose 5%—but the platform’s pricing power ensures profitability even if volume dips.

For quality investors, platforms like Rightmove are goldmines: high margins (80%+), pricing power, and network-driven growth make them ideal for compounding wealth, as long as regulatory risks (e.g., anti-competitive scrutiny) remain low.

Insurance: Underwriting Excellence and the Combined Ratio Advantage

In the insurance industry, the cost stick is heavily influenced by the combined ratio—the sum of the loss ratio (claims paid as a percentage of premiums) and the expense ratio (operating costs as a percentage of premiums). A combined ratio below 100% means an underwriting profit; above 100%, you’re losing money on underwriting and relying on investment income. The price stick is the premium charged, and the value stick is the perceived reliability and coverage quality.

Kinsale Capital, a U.S.-based excess and surplus (E&S) insurer in my portfolio, excels here. Kinsale’s combined ratio in 2024 was 81.2%, the lowest in the E&S sector, compared to peers averaging 90%–95%. This reflects superior underwriting—Kinsale’s data-driven approach minimizes claims (low loss ratio) and streamlines operations (low expense ratio). A lower cost stick allows Kinsale to either charge competitive premiums (keeping price below value to win customers) or widen margins while maintaining market share. In 2024, Kinsale’s gross written premiums grew 35%, outpacing competitors, as its cost advantage attracted more business.

Volume is critical in insurance—more policies mean more premiums to invest—but underwriting discipline ensures profitability. Kinsale’s ability to move the price stick slightly to the right (e.g., 5% premium increases in 2024) without losing customers stems from its value proposition: reliable coverage at competitive rates. For quality investors, Kinsale’s low combined ratio and growth trajectory make it a standout, though monitoring competitors’ risk-taking (e.g., underpricing to gain share) is key, as it could signal calculation errors or unsustainable strategies.

Professional Services: Competitive Value Creation

Professional services, such as accounting or consulting, are highly competitive, with thin margins (10%–15%) and a constant need to prove value. The cost stick includes labor (e.g., salaries for skilled professionals), the price stick is the fee charged, and the value stick is the client’s perception of the service’s impact—often tied to expertise, outcomes, or relationships.

Kelly Partners, an Australian accounting firm in your portfolio, illustrates how to navigate this. Kelly Partners focuses on small-to-medium businesses, acquiring local firms and integrating them into a network that shares resources (e.g., IT, marketing). This moves the cost stick to the left—centralized operations reduce per-client costs by 10%–15% compared to standalone firms. The value stick is extended through a client-centric model: Kelly Partners offers fixed fees, unlimited access, and proactive advice, creating a perception of outsized value. This allows them to move the price stick modestly to the right (e.g., 5% annual fee increases) without losing clients, as the value (trusted, comprehensive service) exceeds the price.

Volume in professional services is about client count—Kelly Partners grew its client base by 20% in 2024 through acquisitions—but retention is key. A 98% client retention rate ensures steady revenue, while cost efficiencies boost margins to 20%, above the industry average of 15%. For quality investors, Kelly Partners demonstrates how operational leverage and client value can create a competitive edge in a crowded field, though scalability per location remains a challenge due to the labor-intensive nature of the business.

Luxury: High Brand Premium, Low Volume, High Margins

In the luxury industry, the dynamics flip: volume is low, but the brand premium is immense, allowing the price stick to far exceed the cost stick. Companies like Hermès and LVMH thrive here. The cost stick is higher than in FMCG—handmade products (e.g., Hermès Birkin bags) or high-end materials (e.g., LVMH’s Louis Vuitton leather) drive production costs—but the value stick is stratospheric, fueled by exclusivity, heritage, and scarcity. Hermès limits production (e.g., 12,000 Birkin bags annually), creating waitlists that enhance perceived value, while LVMH leverages cultural events like the Paris 2024 Olympics to elevate brand prestige.

This allows luxury firms to set prices at extreme premiums—Hermès bags often retail for $10,000–$150,000, with production costs estimated at 10%–15% of that (industry estimates). In 2024, LVMH’s Fashion & Leather Goods segment (50% of revenue) saw a 1% organic decline but maintained a 23.1% operating margin, while Hermès reported a 17% sales increase, with margins at 40% (per recent earnings). The low volume—Hermès sells far fewer units than Unilever’s Dove—means margins, not scale, drive profits. Moving the price stick further to the right (e.g., Hermès’ 8% price hike in 2024) doesn’t deter customers, as the brand’s value far exceeds the price.

For quality investors, luxury offers high margins and pricing power, but risks include economic downturns (e.g., China’s luxury slowdown in 2024) and brand dilution if volume increases too much. LVMH’s diversification (e.g., Tiffany’s 400% growth in high jewelry since 2021) and Hermès’ scarcity model make them resilient compounders.

Conclusion: The Art of Moving Sticks in Quality Investing

Across industries, the interplay of cost, price, and value sticks reveals unique challenges and opportunities for quality investors. In FMCG, tight margins and private label competition make giants like Nestlé and Unilever less attractive, as their price stick risks overshooting value. Retailers like Dino Polska shine by moving the cost stick left through innovation, preserving volume in a price war. Software (Nedap) and platforms (Rightmove) leverage customer stickiness and network effects to push the price stick right, balancing churn and volume growth. Insurance (Kinsale Capital) wins by lowering the cost stick via underwriting excellence, driving volume through competitive pricing. Professional services (Kelly Partners) require relentless value creation to justify price increases, with volume tied to client retention. Luxury (Hermès, LVMH) thrives on low volume and high brand premiums, making the price stick almost infinitely flexible.

Quality investing demands understanding these industry-specific dynamics. The best compounders—Dino, Nedap, Rightmove, Kinsale, Kelly Partners, Hermès, and LVMH—master the dance of cost, price, and value, ensuring their sticks align to maximize margins, retain customers, and grow volume sustainably. As markets decline, these are the businesses we want to own: resilient, adaptable, and poised to turn volatility into opportunity.

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