Zenith Finance Blog

RBA Finance

Price makers and Price takers

It is a no-brainer that it is better to be a price maker than a price taker; but how do you get there in a competitive market place

There are some businesses that are ‘price takers’ that is, they need to compete on price against competitors because that is the key driver for consumers. This for example is the case when you look for budget air fares. The operators have no opportunity to change this situation.

For example, let’s look at the situation of a dairy farmer (and there are fewer and fewer of you around). They have very little control over the price they receive for their milk. Say their contract was due for renewal they changed companies which enabled them to increase the price, but otherwise they have very little opportunity.

So their profit improvement strategy has to focus primarily on minimising costs.

Essentially agricultural producers and suppliers in the fresh food chain are in a similar position. So how would they be able to somehow differentiate or to add value in some way in order to be able to increase price?

There are others that can be described as a ‘commodity’ business. In other words, their product is a commodity where there is no perceivable difference from one business to another other than price.

Price takers include:

  • Grocery stores
  • Booksellers
  • Car rental operators

The challenge for producers of goods as well as service providers is to find a way to change it so it is not just the cheapest price that is the determining factor. Even contemporary professionals such as web designers of web hosting companies are caught in the price taker grip. Whereas 10 years ago, the web designer could command a premium for their creative and innovative designs today providers such as WordPress make it nigh impossible to be anything but a price taker.

In looking at developing a profit improvement strategy the focus could on the two components of price and volume.

But let’s first look at your costs because to increase your profit you must increase your sales by more than your costs.

Variable Costs
There are ways to lower your variable costs:

  • By buying smarter, or 
  • Getting benefits from technology, or 
  • From economies of scale that come from increased volume.

For example, if you are operator of several café and restaurant businesses you can negotiate attractive supply deals with milk vendors, fresh bread suppliers as well as food and beverage suppliers

There are other examples such as people who own sandwich shops buying soft drinks cheaper at the big supermarkets than they can from their normal supplier.

You should continually be on the lookout for ways to reduce your variable costs although the options can often be quite limited.

Importantly, if you have a range of products and services look for ways to bundle up these products or services in such a way as to meet the price in the market but to gain margin improvement by reducing your cost of selling the components of the bundle individually. Creativity does have a place in business. And that is where you can become the price maker; not the taker.