What Does Price Taker Mean?
A price taker is a term used to describe companies that do not have a specific competitive advantage allowing them to charge a premium for its services or products. These companies essentially compete on price, so they must continually look for ways to reduce their cost structure to maintain margins. When assessing potential acquisitions, buyers will likely forgo price takers or compute a valuation discount for them. This is because price takers are likely to have their margins continually challenged by lower cost providers, which diminishes their ability to generate future free cash flow.
Divestopedia Explains Price Taker
Price takers are usually unable to charge more for their product or services due to the following common reasons:
- Lack of size, critical mass and scalability — The company is small and, therefore, does not have the capacity to provide multiple services in multiple locations at a premium price;
- Lack of technology differentiators — The technology offered by the company can be easily replicated, or there is no technology serving as a barrier to entry for lower cost competitors;
- Mediocre execution — The company simply does not execute better than its competitors. For example, in industries where there is a fixed price or unit rate, if the company is less efficient, its rate per hour will have to be lower in order to deliver on the contracted amount; and
- Lack of relationships — The company may not have established relationships or brand loyalty from its customers to warrant charging a higher price.