Compiled by Preya Pandya
Who or What is a Price Taker?
A price taker, in economics, refers to a market participant that is not able to dictate the prices in a market. Therefore, a price taker must accept the prevailing market price. A price taker lacks enough market power to influence the prices of goods or services. Characteristics of Price-takers:
- in a market of perfect competition or
- one in which all companies sell an identical product, there are no barriers to entry or exit,
- every company has a relatively small market share, and
- all buyers have full information of the market.
- producers and consumers of goods and services
- buyers and sellers in debt and equity markets.
What is a Price maker?
Price makers are able to influence the market price and enjoy pricing power. Price makers are found in imperfectly competitive markets such as a monopoly or oligopoly market. They set prices based on elasticity for that market, so the more inelastic the demand for a product, the more a company can set the price. Hypothetically price makers should be able to increase or decrease product prices without losing sales.
- consumer goods manufacturers,
- pharmaceutical companies and
- technology groups
Price Maker and Price Taker
The key difference as you can see is:
|Price Maker||Price Taker|
|Strong Pricing model||Weak pricing model|
|Unique product||Product lacks uniqueness|
|Less competition||More competition|
Price maker diagram
Many important elements are included in the price maker diagram. Price and quantity demanded are inversely correlated. Any company now that has a decreasing slope in the demand curve can be classified as a price maker. This means that the diagram depends on the factor of demand because the price power may be weak in such a situation.
How to be a Price Maker:
- Create customer value: The process of creating customer value consists of two steps. You need to provide the customer a reason to work with you. A motivation for the customer to purchase is created by focusing on the four fundamental customer values of convenience, availability, product or service functioning, and relationship. However, you must also get rid of excuses for the customer to not buy.
- Choose your customers: The logical extension of giving customers value is to pick clients or purchasing scenarios where the value is acknowledged. One of the most important steps in the entire entrepreneurial process is selecting your target market carefully. This will dictate how you will price everything. Concentrate only on the market segments where you may deliver higher perceived value as determined by client set or purchasing situation.
- Be different: While many managers talk about uniqueness, when things get difficult, they tend to imitate their competitors. To be a price maker, be different! The difference can be in the nature of the customer value created, the way it is created, or for whom it is created. The more different you are, the greater your opportunity to set your own price. A commodity is defined as “undifferentiated.” Adding this factor to your business is the key to unlocking its true potential.
- Determine customer value: Create a method for basing the price you charge on each customer transaction on the value you deliver, either in terms of quantity or quality. Every transaction offers the chance to price in line with consumer value. To accomplish this, pay close attention to your pricing strategy.
- Deliver on your promise: Your buyer will have an excellent reason to bargain, focusing on price, if you don’t fulfil your promise. Customers who feel their expectations have been met are happier, act better overall, and focus less on price. For instance, there is a tonne of evidence showing that happy consumers pay faster than unhappy ones. Businesses that don’t live up to their promises of value inevitably fail.
Some Examples of how to be a price maker:
- Google & Apple: An ecosystem of mobile applications is now available on the Play Store thanks to Google’s Android mobile operating system. Thus, it demands licensing payments from companies that produce mobile devices. As a result, it can raise prices without being constrained by users, mobile device manufacturers, or even competitors. In a similar vein, Apple dominates the smartphone market in the US and other wealthy countries with its iPhone. By lowering output, it raises its price without giving customers or rivals a second thought. As is clear, market leaders with distinctive patented goods and software, like Apple and Google, can set prices.
- Electron Inc: Let’s say Electron Inc. manufactures an automatic day/night switch for the street lights. It sets the price per switch at $150 and has a sole patent for this product. The company spends only $15 to produce a switch, resulting in a 90% profit on each unit that is sold to the market. Additionally, Electron Inc. can only make 100,000 switches annually, which is significantly less than the market’s high demand for auto day-night switches. As a result, it can control the market price of the switches for three main reasons:
- Absence of any rivals in the manufacturing of auto day-night switches
- High demand for the device
- High profit margin per device
Therefore, Electron Inc. controls the market price of the product. Due to the huge demand, it becomes a price maker and could raise the price to $300 or more with no competition.
Consult us today on how to be a price-maker and not a price taker.
We at MANTRAA Advisory LLP, help startups become price-makers. This includes methods such as:
- Fixed price options
- Dynamic pricing