The test most companies have never run
The symptom shows up before the cause. The owner complains that raising prices would cost sales—or the opposite: they feel they are leaving money on the table by charging the same as competitors despite delivering more value. Both complaints stem from the same issue: no one has stopped to ask whether the company is truly free to set its own prices.
There are two possible positions here. A price-taking company does not choose how much to charge: it accepts the prevailing market price because what it sells is similar enough to what its competitors offer. A price-setting company has that freedom because customers see a real difference between it and the alternatives—and are willing to pay for it.
Confusing these two situations accounts for many of the pricing errors that later show up in the spreadsheet as if they were calculation errors. They aren't. They're diagnostic errors.
What Determines the Group: Differentiation, Not Size
The first instinct is to assume that large companies set prices while small companies accept market prices. But that is not what determines their position. What matters is the differentiation customers perceive, not the size of the company.
A small distributor selling the same replacement part as every competitor is a price taker, no matter how large its operation: customers will switch suppliers over a difference of just a few cents because the product is the same everywhere. A small service provider with a proprietary method that customers cannot find elsewhere is a price maker: buyers are willing to pay more because they cannot get the same service anywhere else.
The right question isn't "how much revenue does my company generate?" or "how many competitors do I have?" It's this: if I raise prices by 15% tomorrow, will my customer switch suppliers without a second thought, or will they hesitate because there is no direct substitute for what I offer?
A quick test to classify your company
Five questions help assess where the business stands before making any pricing decision:
- Can customers explain, without looking it up, why they buy from me rather than my closest competitor?
- If I raise the price by 10%, will I lose customers to competitors that keep their prices unchanged, or will customers accept it because they see no equivalent alternative?
- Does my product or service have any feature—technical, service-related, or related to delivery times—that competitors cannot easily replicate?
- When customers ask for a discount, whose price exactly are they comparing mine with? A similar competitor's, or no one's?
- Does my margin vary from customer to customer, or is it always the same regardless of who buys?
Answers leaning toward “yes, I’m easy to replace” indicate a price taker. Answers leaning toward “no, what I offer is hard to match” indicate a price maker. Most companies are not 100% one or the other—but there is almost always a product line that leans more heavily one way, so it is worth assessing each line separately rather than treating the entire company as a single unit.
What Changes in Practice for Each Group
For a price taker, the market sets the benchmark, not the cost spreadsheet. Charging more than competitors drives customers away; charging less fuels a price war that erodes everyone’s margins, including those of the company that started it. The answer is not to hold out for a higher price—it is to cut costs, gain scale, or gradually move away from product lines that closely resemble competitors’ offerings. A pricing spreadsheet or software helps simulate these scenarios before making a decision.
For a price maker, the risk is the opposite: using market benchmarks where they do not apply. If no competitor offers the same level of differentiation, comparing your price with theirs means undervaluing your own offering. The goal is to measure what customers truly value and translate that into a price—not copy someone else’s price list out of insecurity.
The most common mistake: treating both situations as if they were the same
The most common mistake in practice is not choosing the wrong formula. It is applying a fixed markup—the same percentage over cost—across the entire product line, without distinguishing between prices you take and prices you set.
A distributor sells two items. Item X is a standardized part identical to those sold by three competitors in the region, with a cost of R$80. Item Y is a part exclusively customized by the company itself, also at a cost of R$80. The company’s policy is to apply a 50% markup on cost to every item:
- Item X: price = 80 × (1 + 0.50) = R$120.00
- Item Y: price = 80 × (1 + 0.50) = R$120.00
The problem becomes clear when you look at the market: competitors sell item X for R$ 95, and the company loses the sale whenever customers compare prices. Item Y, on the other hand, has no direct equivalent and could support a 90% markup without losing customers, because there is nothing else for them to compare it with.
- Item X, aligned with the market: 19% markup on cost → price = 80 × (1 + 0.19) = R$95.20
- Item Y, value-based: 90% markup on cost → price = 80 × (1 + 0.90) = R$ 152.00
The formula is still cost-based markup in both cases. What changes is the criterion used to set the percentage—and it only makes sense to set that percentage after determining which of the two groups each product belongs to.
A classification, not a verdict
Price makers and price takers are not fixed labels. A price-taking company can shift its position if it truly differentiates what it sells—through service, lead times, or a technical feature that is difficult to copy. And a price maker can lose its position if the difference that supported its price becomes commonplace in the market, which happens more often than you might think.
The practical point is not to decide today, once and for all, what kind of company yours is. It is to review this classification by product line on a regular basis, because it changes—and if pricing does not keep up, it becomes outdated before any adjustment is even made. Anyone familiar with the distinction between the form and substance of price will see the connection: here, the question is who controls the number; there, it is what lies behind it.
