Be a Price Maker Not a Price Taker
Monday, December 11, 2017
What's a price taker?
A price taker is a business that has minimal pricing power. In other words, it is forced to provide whatever offerings a customer demands at whatever the going rate happens to be.
This is in contrast to a price maker who sets his rates independently of what others may or may not be charging. He'll hopefully charge above the rates charged by price takers, as the word for someone who charges below the going rate is either broke or sucker, charitable institutions excepted.
What's so terrible about being a price taker?
Nothing. There are plenty of examples of successful firms and individuals that spend their entire existence as price takers. Those offering legal services, surgical wizardry or even accounting expertise can earn significant incomes by offering their wares at the market rate.
That said, price takers are fundamentally working in a commodity business. They're seen by customers as interchangeable providers that are anything but unique. Yes, Mr. Rogers may have been right when he called everyone special, but in the eyes of most customers, a person who offers a commodity is no different from any other provider.
Price makers, on the other hand, enjoy a great deal of market power. They are seen as premium providers and are excused from much of the red tape and cheapskate customers that plague the offices of price takers.
How do I know if I'm a price taker?
There are many economic formulas that can be used, but here's a basic rule of thumb that cuts through much of the nonsense:
If you introduce yourself to potential customers by what you do, you're a price taker. Whether you're a highly-trained neurosurgeon, or a person who performs unskilled labor, if you're known by your role, you can consider yourself to be a price taker. It isn't all that hard to find examples of firms that advertise themselves as price takers. They're everywhere. However, if you introduce yourself by your own name (or the name of your firm), you might just be a price maker.
Let's take a look at an example from Hollywood.
How expensive is it to hire an actor for a movie?
A producer can probably find a capable (albeit unknown) actor on the cheap. Assuming that the Screen Actors Guild isn't involved, the producer could probably hire a great actor who would be happy to perform his craft in exchange for little more than a free lunch and the promise of potential exposure. This happens more than you might think. The 1990s super-franchise Mighty Morphin Power Rangers made offers to cast members for as little as $300 per episode.
But what if a relatively unknown actor won't cut the mustard? What if the producer wanted to hire a megastar like Harrison Ford, whose worldwide box office gross exceeds six billion dollars?
He'd have to pay substantially more.
Some would argue that it's not a fair comparison. Yes, Harrison Ford is an actor too, but he's in a totally different league. They would suggest that I'm comparing apples and oranges, and that the entire hypothetical comparison of an unknown actor to a household name is ridiculous.
That's the point.
Remember, when the goal was to hire an actor, we could be certain that a suitable choice would be fairly inexpensive. As soon as we decided that we wanted to hire a famous actor, the cost of our little production increased immensely.
How do I become a price maker?
You know the expression, "if it were easy everyone would do it." The path to becoming a price maker is often difficult and fraught with risk.
My upcoming book Premium deals with this matter in depth, but the heart of the matter is that those who want to become price makers must differentiate themselves from the competition. It's not enough to be seen as merely superior. Instead, the goal is to be seen as a completely separate category of offering.
Once this differentiation is established, it must be maintained on a continuous basis, lest other parties begin to duplicate the qualities and characteristics that currently set a price maker's offering apart.
Firms with aspirations of price making would do well to consider the following characteristics:
- Excellence in results or capabilities - Superior results will often lead customers to value a firm's offering more highly. When results are difficult to capture, signaling via credentials, capability metrics, or other information can prove to be an excellent substitute.
- Excellence in reputation - Vendors must position themselves, and their offerings, so that potential customers set them apart from other vendors. Although one would assume that reputation is a direct result of excellence, I assure you that this is often not the case.
- Excellence in mindshare - Many visitors to Las Vegas head directly to The Strip. Little do they realize that smaller casinos just next door offer lower prices and shorter lines. Mindshare can mean a lot. It's why brands like Coca-Cola spend tremendous sums each year on advertising. The dollars aren't spent in order to reach customers who aren't aware of their products. Rather, the advertising is used as a blocker in order to prevent other brands from occupying space in shoppers' minds.
If you want to start earning outsized revenues, you'll need to stop taking prices and start making them instead.
It's not easy, and it requires a radical shift in process.
Nevertheless, becoming a price taker is a fundamental part of outsizing the success of any business.
Are you trying to figure out how to become a price maker? Do you need help figuring out how to rise above the competition? Contact me. I can help!