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Not all pricing power is created equal

The power of Xero

Investing newsroom
Sam  Dickie, Senior Portfolio Manager — New Zealand Shares and Property & Infrastructure

Sam Dickie
Senior Portfolio Manager — New Zealand Shares and Property & Infrastructure | Email Sam »

05 February, 2020

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Xero has demonstrated strong pricing power globally, lifting its product prices significantly faster than local inflation while weaker competitors have been cutting prices.

Clear evidence of pricing power is often clear evidence of a wide economic moat.  And Xero has the clearest evidence of pricing power in our universe.     

 

As Warren Buffet said, “The single most important decision in evaluating a business is pricing power.  If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business”.

Xero has not only lifted the pricing of its core cloud accounting product significantly faster than local inflation rates in its core markets, but it has also been gaining business relative to competitors at the same time!

In the last few weeks, Xero sent out price increase notices to its customers in Australia, NZ, the US, Canada, HK, Singapore and South Africa.  It is raising prices by around 4% on average across the board.  It had already lifted prices in the UK by around 6% on average last year.

Since June 2018, Xero has lifted its prices at an average annual rate of 4.6% in Australia, almost three times as fast as the local inflation rate.  It has raised its prices by around 6.2% in the UK, more than three times as fast as the local inflation rate.  It has raised its prices by around 2.4% in Singapore, more than four times as fast as the local inflation rate.             

Xero is demonstrating strong pricing power

In stark contrast, MYOB in Australia has cut prices over that same time frame. 

Despite Xero raising prices significantly in excess of inflation and MYOB cutting prices, Xero has taken market share from MYOB. 

Another form of pricing power is relative pricing.  Xero’s average price in the UK is almost three times as high as it nearest competitor, Intuit.  

Why?  Because customers love Xero’s product.  We undertook a proprietary survey of accountants that use and recommend all of the key cloud accounting products in the market.  88% of the respondents ranked Xero “good” or “excellent” whereas only 80% ranked Intuit’s competing QuickBooks Online product “good” or “excellent”. 

Accountants were asked to rank the importance of nine criteria when recommending accounting software solutions to their clients.  They ranked price at number eight.  Ease of use, security and integration with other systems or applications were considered significantly more important.

Despite customers not ranking price as an important criteria when making an accounting software purchase decision, Xero continues to give customers extra value for money as it raises prices.  The most recent price rise was accompanied by “putting Hubdoc in the hands” of anyone that subscribes to the Xero plans.  Per Trent Innes, head of Xero Australia, “Hubdoc automatically extracts key data from bills and receipts, reduces manual data entry and saves small businesses’ time….book-keeper Bean Ninjas say it saves more than 22 hours a month using Hubdoc”.    

In a world where inflation is expected to remain low for the foreseeable future (10-20 year market expectations for inflation in New Zealand are only around 1%), Xero’s pricing power is going to be worth its weight in gold.   

 



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