Definition - 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.