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What is the going rate pricing method?
In the going rate-pricing method, price is determined on the basis of present rates prevailing in the market. Companies may set prices high or low depending on product/services to their competitor's prices.
This method of pricing is useful for products/services which show fewer variations between producers. It is also called a competitive parity method. In this method, competitor's price is taken as base and price is set according to objectives, services offered and product quality.
The advantages of the going rate-pricing method are as follows −
- Competitor's price is taken as base.
- Uniform price in market.
- Misguiding customers is protected.
The disadvantages of the going rate-pricing method are as follows −
- Only competitor price is considered.
- Inaccurate decisions.
- Production costs etc. are ignored.
How to calculate markup pricing?
(Unit cost of manufacturing a product = Rs.150/-, return on sale (expected) = 20%)
Formula − mark up pricing = unit cost / (1- expected sale on return) => 150/(1- 20%) => 150/0.8 => Rs.187.5/-
How to calculate target return price?
(Total investment = Rs.100000/- and ROI (desired) = 22%, total incurred cost = Rs.45000/- and sales (expected) = 1000 units)
Formula − target return price = (total incurred cost + rate of investment (desired)/ total investment
→ rate if investment (desired) = ROI (desired) * total investment => 22% * 100000 => Rs.22000/-
→ total return price = (45000 + 22000)/1000 => Rs.67/-
How to calculate break even pricing?
(Fixed cost = Rs.2500000/-, variable cost = Rs.40/-, selling price = Rs.80/-)
Break even limit = fixed cost (total) / (selling price − variable cost) => 2500000/
(80-40) => 2500000/40 => 62500 units
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