What is Going Rate Pricing?
Going Rate Pricing is a pricing strategy where a company sets its prices for products or services based on what its competitors are charging. In this method, the company essentially follows the pricing trends set by its rivals in the market. This approach is commonly used in industries with homogeneous or similar products, such as steel or paper production.
The key advantages of Going Rate Pricing are its simplicity and market consistency, as it helps maintain uniform prices. Customers may also find it less confusing when prices are similar across competitors.
However, this method has limitations. It focuses solely on competitors’ prices, ignoring other crucial factors like production costs and customer demand. Additionally, it can lead to pricing inaccuracies if competitors’ strategies change rapidly.
Overall, Going Rate Pricing is a strategy that aims to align a company’s pricing with market norms by following the lead of its competitors.
Factors Affecting Going Rate Pricing
The following are the 5 key factors that affect going rate pricing:
- Competitor Pricing: The most significant factor influencing Going Rate Pricing is the prices set by competitors. Companies closely monitor what their rivals charge for similar products or services.
- Market Demand: Market demand plays a crucial role in determining prices. When demand is high and supply is limited, companies may charge higher prices even in a Going Rate Pricing model.
- Production Costs: Although Going Rate Pricing primarily relies on competitors’ prices, production costs are still a factor. Companies need to ensure that their costs are covered by the prices they charge.
- Customer Perceptions: Customer perceptions of a product’s value can affect pricing. Even in a competitive pricing environment, if customers perceive a product as offering unique value, a company may set higher prices.
- Elasticity of Demand: The price elasticity of demand, or how sensitive customers are to price changes, can impact Going Rate Pricing. If demand is inelastic, meaning customers are less price-sensitive, companies may have more flexibility with pricing.
Read More: Differential Pricing Strategy
Advantages of Going Rate Pricing
Pros of going rate printing are:
Competitive Edge
Going Rate Pricing allows companies to remain competitive by aligning their prices with industry norms. This helps attract price-conscious customers and keeps the company in the race.
Market Stability
This pricing strategy promotes market stability by preventing price wars. When companies maintain similar prices, it reduces the risk of sudden price fluctuations that can disrupt the market.
Simplicity
Going Rate Pricing is straightforward. Companies don’t need complex pricing models or extensive market research. They can simply follow the prevailing rates set by competitors.
Read More: Value-Based Pricing – Definition
Customer Trust
Customers often have trust in established industry pricing. When a company adopts Going Rate Pricing, it can benefit from this trust, as customers are more comfortable with familiar pricing structures.
Quick Adaptation
In rapidly changing markets, Going Rate Pricing allows companies to quickly adapt to price changes without extensive analysis. This flexibility is valuable in industries with evolving conditions.
Disadvantages of Going Rate Pricing Strategy
While this pricing strategy offers various benefits, it also has some drawbacks:
Profit Margin Challenges
Going Rate Pricing may limit a company’s ability to achieve higher profit margins. Since prices are aligned with competitors, it can be challenging to charge premium prices for superior products or services.
Read More: Perceived Value Pricing
Price Wars Risk
In competitive markets, following the going rate may lead to price wars. Companies continually undercut each other, reducing overall profitability and potentially harming the industry.
Limited Profit Potential
This pricing method might not be suitable for companies aiming for substantial profit growth. It keeps prices relatively stable, which may hinder profit potential, especially if cost structures vary.
Innovation Impediment
It may discourage innovation. Companies might be less inclined to invest in research and development if they are content with matching competitors’ prices.
Customer Perceptions
Some customers may perceive going rate pricing as a lack of creativity or effort in pricing strategy. It could affect a company’s image if customers believe it is simply following the crowd without offering unique value.
Read More: Break Even Pricing – Definition
Examples of Going Rate Pricing
This pricing strategy is popular nowadays, you can find it used in different sectors. The following are five to mention:
Oil and Gas Industry
In the oil and gas sector, prices for crude oil are often determined by international market rates. Companies within this industry usually adjust their prices to align with global crude oil prices. Whether it’s a barrel of oil or the cost of gasoline at the pump, these prices closely follow the going rate in the global market.
Airline Industry
Airlines frequently adopt going rate pricing for ticket fares. They monitor competitors’ prices and adjust their own accordingly. During peak travel seasons, airlines may charge higher prices, while off-peak periods often see lower fares. This dynamic pricing strategy allows airlines to stay competitive and optimize their revenue.
Read More: Target Return Pricing – Definition
Agricultural Products
In the agriculture sector, commodities like wheat, corn, and soybeans often follow going rate pricing. These products are traded on commodity markets, and their prices are influenced by global supply and demand. Farmers and traders adjust their prices based on prevailing market rates.
Hotel Industry
The hotel industry uses going rate pricing extensively. Hotels in the same location often set their room rates in line with competitors. During peak tourist seasons, prices tend to rise, while discounts are offered during off-peak periods to attract customers. This pricing approach ensures that hotels remain competitive within their local markets.
Mobile Phone Plans
Telecommunication companies frequently employ going rate pricing for mobile phone plans. They monitor the pricing strategies of their competitors and adjust their plan rates accordingly. This dynamic approach allows them to respond to changes in the market and remain competitive while offering various plans to attract different customer segments.
Read Next: What is Markup Pricing? Definition, Example, and Pros/Cons
Arti Kushmi holds a BBS (Bachelor in Business Studies) degree and shares her business and marketing knowledge through this website. While not writing she will be reading and enjoying the moment.