There are two kinds of companies – Price Setters and Price Takers

When Amazon introduced its Kindle Fire it positioned it as a direct competition to Apple’s expensive iPad. In a letter published in its landing page, Mr. Bezos drew a clear distinction between Apple’s pricing strategy and Amazon’s pricing strategy. Apple was not explicitly named in the letter, but not hard for all to see who Mr. Bezos was talking about.

The two kinds of companies, according to Mr. Bezos, are those that focus on charging more vs. those that focus on charging less. While that is a pricing distinction Mr. Bezos want to drive for Kindle Fire positioning, there is another way to classify companies – based on the level of control they have in pricing their products. In fact I should say, the level of control they are willing to exercise and follow through in pricing their products.

There are indeed two types of companies; those that work hard to set prices (Price Setters) and those that just tag along, take market prices and work hard to stay alive (Price Takers). Be it charging for perceived value to customers (Apple’s pricing) or charging to reach the mass market and keep out the competition (Amazon), they both have a well defined strategy and work hard to implement it.

When Mr. Jobs was Apple’s CEO he used to say (some version of it)

If we knew how to make cheaper products that we are not ashamed of putting it in your hands, we would have made it

When Mr. Bezos talks about pricing (as recently as last week in Times) he seems to be saying (paraphrased)

We are not thinking short term, we can keep our prices low for a long long time, longer than our competitors can stay solvent

The core strategy and their commitment to follow through on it come through clearly in such statements. Apple and Amazon are Price Setters. They are not going to let the market set their prices.

Apple and Amazon are not alone in this class, Wal Mart , Whole Foods, lulu lemon, Wall Street Journal, REI, and most luxury brands (across all categories) are also  Price Setters. But this is small class of companies.

Price Takers are a large class of companies. They have no pricing strategy or if they have one they lack the will and wherewithal to follow through. They react. They let the markets decide their prices. You can go back and look at recent price drops of many products and see for yourselves who belong to this class.

Mr. Bezos wrote in his letter, companies that charge more and those that charge less can both thrive. Unfortunately that is not the case when it comes to Price Setters and Price Takers.

Price Setters will thrive and go on to create significant value over long term.

Price Takers will be relegated to the footnotes of history.

6 thoughts on “There are two kinds of companies – Price Setters and Price Takers

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s