What Does Price Leader Mean?
A price leader, in the context of buying and selling a business, is a term used to describe companies that have a specific competitive advantage allowing them to charge a pricing premium for its services or products. When assessing potential acquisitions, buyers look for price leaders that can defend and/or improve their pricing even further as this provides the potential for higher future free cash flow (FCF).
Divestopedia Explains Price Leader
A price leader can charge more usually due to the following common reasons:
- Size and critical mass — this may allow the company to charge a premium given its overall capacity and ability to provide multiple services in multiple geographies;
- Technology — the existence of a patented technology may influence the premium that the company charges for its products;
- Superior execution — a company may simply execute better than its competitors. This is particularly applicable in industries where there is a fixed contract or unit rate. The rate per hour charged may be higher, because the company is more productive, which allows it to still deliver on the contracted amount; and
- Relationships — buyers will pay goodwill for established relationships with customers. This is because relationships, coupled with superior execution, develop brand loyalty, which usually results in an ability to charge more.
Companies that are price leaders command valuation premiums, whereas the value of price takers is usually discounted by buyers. This is because companies that underprice their products or services deliver lower margins, lower free cash flow and, consequently, lower returns for their shareholders. Buyers discount the purchase price for companies that have not figured out the right price to charge for its products or services.
