What is the going rate pricing method?

FinanceFinance ManagementBanking & Finance

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.

Advantages

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.

Disadvantages

The disadvantages of the going rate-pricing method are as follows −

  • Only competitor price is considered.
  • Inaccurate decisions.
  • Production costs etc. are ignored.

Example

  • 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

raja
Published on 17-Jul-2021 16:17:34
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