When you’re a price taker, you just take what’s given to you. You’re not dictating the terms but you’re taking someone else’s terms. While that is fine to do so temporarily, always try to figure out a way to be a price setter by the end of it all.
This is the same with content. Don’t be a consumer of content, be the creator of content. When you take what someone else gives you, you just have no idea if you’re making a good deal or not. How do you stop being a price taker and become a price dictator? You start your own businesses and/or side hustle.
These days, with the invention of the internet, there’s no limit to what you could do. You could create a popular Youtube channel and put in years of work into the platform. Remember that Mr. Beast took 6+ years before his Youtube platform finally took off.
It may take years and years of consistent effort before you finally get the big pay day. However, that’s great news for you. As long as you continue to put in the effort and don’t give up, there’s a good chance you’ll finally make it. Additionally, it discourages future people from actually putting in the effort themselves.
After a year of continuous effort with no results, others eventually give up and leave the room for you to acquire their customers. That’s how the game goes. Too many people give up on their craft just before they hit their big pay day. That’s where you can swoop in and exert your staying power over them.
What is a Price Taker?
A price taker is someone who doesn’t have the power to set the prices in a given market. A price taker always accepts the prevailing market price and whatever that price ends up being. They have no power or influence to change the power dynamics at play in a transaction.
This is the complete opposite from a price maker and/or price setter.
Sure, price takers can take advantage of either coupons or sales that the price maker offers from time to time. However, they can only take advantage of those things if it’s offered. They can never ask for it and have it be accepted, it always has to be offered by someone else.
That’s not a good spot to be in. In the past where we predominantly lived in a bargaining society, people usually had the power to haggle. These days, the vast majority of transactions are “take it or leave it” transactions. However, that doesn’t mean that you have to be a price taker.
There are always unique differentiation points between customers that you have the negotiating power to do so. You have to do some homework and find those differentiation points. I personally refuse to just take the market price. I ALWAYS figure out a way to get some sort of a discount from the retail price.
It’s how I have a 50%+ savings rate even after taking my fun money budget into consideration. There’s no way that you can’t do that either. So before we go further into why you shouldn’t be a price taker, let’s go over the market participants who are. There are many.
Examples of a Price Taker
One example of a price taker is someone who doesn’t DESTROY that social share button and posting to their favorite social media! There’s a good chance that many of your friends are one and that they should take steps to not be one.
It’s not a good feeling to find out you are one after the fact. For many years, I’m ashamed to say that I took whatever prevailing market price was. Even if your friends don’t think they have the power to change that, they do. If all it takes is just one share for your friends to realize that, why wouldn’t you do it?
Let’s put the power back into the consumers!
So with that said let’s get into examples of who can be someone who just accepts the prevailing market price.
1) Individuals
This is a common price taker. Many customers just take whatever the market price is without questioning it or thinking that there’s a better deal. Many don’t do research in trying to get a discount. The simplest form of getting a discount is to buy things on credit cards.
You can get up to a 5% cash back on things that you were going to spend money on anyway. However, many people don’t take advantage of these opportunities. Additionally, they don’t do additional research to see if there are better deals out there. With the invention of technology and the internet, this information is readily available.
However, many don’t put in this one extra step. Don’t be one of those consumers who do this. You have the money. When you’re the one with the money, you’re the one with the power. You don’t need the company’s product, the company needs your money. Never forget that.
2) Businesses
Businesses who are in the commodity business are forced to be a price taker. One barrel of oil is generally not different in quality versus another barrel of oil, given they extracted from the same source. Same goes for wheat. Therefore, these businesses are forced to take what the market price is.
Once they charge a penny more than their competitors, customers would flock to their competitors. There’s no difference to them who they get the product from because the product serves the same purpose. These businesses are where the people have the most market power against.
It’s a race to the bottom where companies will offer special discounts just for shopping at their company. These companies usually work with thin profit margins because they need to compete against their competitors. Make sure to know where you stand in the transaction and squeeze the company’s heads if you’re ever in this situation.
Market Power Determines Who is a Price Taker
So now that we’ve gone over the basics of which market participants just have to take the market price, let’s go over what determines it. Everything has to do with what kind of market you are in.
1) Perfect Competition Market
A perfect competition market is where there is absolutely no edge that can be exploited by anyone. It’s a market where there is zero government intervention, there is zero information asymmetry, and there are zero invaluable advantages from one market participant versus another.
The characteristics of a market in perfect competition is as follows:
- Zero product differentiation. The products are completely the same and there is no difference between one company’s product versus another.
- No information asymmetry. Everyone knows the exact same information when it comes to price. All the buyers know of coupons that are out there and know when sales are taking place. Additionally, there’s no time-lag of knowing the information, either.
- No barriers to entry or exit. It’s is very easy to enter a market without the need to have large upfront capital or knowledge in order to enter or exit the market.
- No transaction costs. Said another way, “the price is the price”.
- Many buyers and sellers in the market. There’s no one firm that controls the entire supply of product and no one customer that every single company has to cater to. The quantity for both supply and demand is large.
In this scenario, everyone is a price taker. If you try to buy for a penny less, the company wouldn’t sell to you. If the company tries to sell for a penny more, you would just go to their competitor. No one has any power to change the market price.
The great news is that there is no perfect competition out there in the world. There’s always something that makes competition be imperfect. That means that you don’t have to be a price taker in this world.
You can exert your power over the company as the consumer.
2) Monopolistic Market
In a monopoly, one company owns the supply of all of the product that’s on the market. This is a nightmare scenario for consumers because who else is the consumer going to get their needs met from? No one else, there’s only one single company that controls the supply of the product.
There’s a good case that Amazon is operating in a monopoly market. However, the good part is Amazon is devoted to keeping prices low for its customers. That could absolutely change if they actually become a true monopoly and we have no other choice but to buy from Amazon.
In a monopoly market, consumers have no other choice but to be a price taker. As time and time passes, more companies will consolidate their power and operate in a monopoly market. Small businesses just can’t compete against big businesses that have the money and infrastructure to support customer’s needs.
This will happen as time passes by.
Why You Shouldn’t be a Price Taker
So now, there are many reasons why you should NEVER EVER be a price taker.
1) Companies Prey on Price Takers
Companies don’t see customers as actual human beings once they realize they are a price taker. They see them as preys who they want to trap and capture and devour to feed themselves. Companies exist to maximize their own profits, not to maximize the well being of society.
Once they figure out you’ll just take and accept whatever terms that they set out, they’re not going to be appreciative of that. They’re just going to continue exploiting and taking advantage of you even more so. When it comes to business, companies are not going to be compassionate.
They are going to act in ways that are in their best interest. Unfortunately, their best interest is not caring about your financial well being. Therefore, don’t let corporations be richer than they already are. Watch out for yourself and take care of yourself.
2) There are Better Alternatives
Whatever product you’re looking at, there’s always a better one that’s even cheaper. The problem is balancing the time it takes to find out a cheaper and better product versus flat out buying the product now. However, it doesn’t take that much more effort these days to do a simple comparison online.
One example was when I had to buy a mattress. When I went in person, the salesperson recommended a particular mattress to me. It was perfect. It was king sized, under $300, and it fit my body very well. The problem was when I took 10 minutes to browse the company’s website after I got home.
I found the exact same brand but for 10% cheaper! I hurriedly cancelled the order from the salesperson and ordered online. The best 10 minutes I spent to save $30, effectively saving close to $180 per hour in after-tax money. It’s hard to make $180 per hour, but it’s not as hard to save $180 per hour.
Not being a price taker is a great thing.
3) You Have the Power, Anyway
If you are a consumer with money, you are the one with power. If you don’t have the company’s product, life goes on as normal. You didn’t have it before and you were living just fine. Companies have to convince you to buy the product, not the other way around.
They need you more than you need them. If the company doesn’t have customers’ money, they don’t survive. They can’t pay their obligations and will eventually have to shut down or declare bankruptcy. However, if you are a price taker, you are completely giving away that power.
Does consumers still get taken advantage of in the real world? Absolutely. Many people don’t want to put in the effort to find great deals that works for them. However, do your best to not let this happen to you often. It can happen from time to time but that should be the exception, not the norm.
4) It’s Easier to Build Wealth When You’re a Price Setter
When you set the prices that customers pay, then you’re the one dictating the terms. That’s a better spot to be in. Negotiate your salary and haggle everything. You won’t make friends and won’t be very likable but that’s what business is supposed to be.
As a price setter, you don’t set prices based on how much it costs to make a product.
You set prices based on how much your customers are willing to pay. For the vast majority of products that are out there, customers are more than willing to pay above margin for products. While you won’t succeed every time, you are still in a great spot if you are a price maker.
You’re the one charging the prices that the other party has to accept. If they especially need your product, then they will be a price taker and gladly pay for it. It’s much easier to build wealth when you operate this way over a long period of time. Much better than just accepting the prevailing market price.
5) More Doors are Open for Price Setters
When you are a price setter and price maker, people come to you. Not the other way around. Through this approach, you get to meet more people which opens up more doors down the road. A price taker deals with a price maker once but a price maker deals with many price takers.
That’s the difference between the two and why it’s better to be a price dictator. More doors are open to them for simply being who they are. They don’t need to exert additional effort for those opportunities, it just comes to them. The great news is that you can be one of them.
With new concepts coming up every day, there’s no way that you can’t figure out a way to be a price setter. You are really only limited by your imagination and the effort that you want to put in. One way that I am trying to be a price maker is by starting this blog.
There are infinite opportunities and possibilities out in the world for you to take advantage of, as well.
It’s Better to be a Price Setter than a Price Taker
Whatever business or side hustle that you want to start, always go into with the mindset that a price maker has it better than a price taker. You’ll see the difference and the results as the years pass. The spread and difference between the two can only widen even further as time passes.
When the invention of the internet, there’s no need to create a physical product anymore. There’s no need to have millions of dollars to invest in creating a factory for your customers. These days people love to buy digital products. Do you know the margin for a digital product? It’s close to 99%.
All you have to sell are lines of code that creates value to customers. When I was younger, I used to play a lot of video games. They would sell intangible goods like game characters. Because I was young, I had no idea what my positioning was against the companies who were offering those products.
I’m ashamed to say that I was a price taker and shelled out hard earned money for those products. These days, I know better. No more will I ever subject myself to that. I understand my position and power as a market participant and act accordingly to what my power is. I haggle and negotiate for the best deals.
Figure out a way to dictate the terms versus the counter-party. When you think that you don’t have any power to exert is when you are wrong. There are plenty of other people who will gladly pay money for your product that you’re selling. You will have a much easier life as a result of it.
