Average or Going-Rate Pricing

Average or Going-Rate Pricing In a perfectly competitive market, where there are many suppliers of homogeneous products, and the new product does not differ (and cannot be differentiated sufficiently by marketing means) in terms of quality or design from existing products, then the firm has little choice but to charge the 'going-rate'. Departures from this price will lead to losses. There are also cogent reasons for accepting the 'going-rate' price in an oligopoly, inasmuch as any attempt to influence demand will be met by retaliation by competitors, with potentially damaging consequences for all. There is an implicit assumption that an acceptable return will be earned under conditions of average efficiency when a company enters either a perfectly competitive or an oligopolistic market, and the emphasis consequently will be on cost control and 'making to a price'. However, as mentioned previously, perfect competition is rarely met with in practice, and true oligopoly by definition does not easily lend itself to fresh competition on a large scale. Although relying on a different category of market, we should not overlook here the case of the firm that attempts to capture a small share of the existing market by differentiating its product sufficiently to generate additional demand at the normal market price, the higher marketing costs being offset by the benefits of greater volume. Premium Pricing and Discount Pricing In most situations, the new product will either differ, or be made to appear different, in a way which will justify a premium over competing products, thereby covering the additional production or marketing costs; or it will be put forward as being of comparable quality, so that at a discount price to the market norm it will procure a larger share of the market than it might otherwise do, thereby counteracting the reduction in selling price. However, in this latter case, care must be taken to ensure that potential customers' perceptions of the product are not prejudiced by the lower price - as the marketing literature frequently points out, the consumer will often view with suspicion a branded product that is priced at even a small discount to the prevailing market rate. Note, however, that with an obviously homogeneous class of products such as petrol or heating oil, despite the presence of a textbook oligopolistic market, it will often be possible for a relatively small firm to capture a tiny but sufficiently profitable slice of the market by discount pricing. As long as it never grows beyond the stage of being a very minor irritant to the majors operating in the market, and poses no real threat to their monopoly profits, there is every chance that the new entrant will prosper. A number of factors can contribute towards successful premium pricing: 1. High price prestige : Market research constantly confirms the existence of a section of the buying public that blindly equates higher prices with better quality goods. These customers will happily pay a premium over competing goods, regardless of their relative intrinsic merits. Although acting from rather different motives, there is another type of customer for whom the payment of a premium becomes a de rigueur response to increased affluence and what is perceived as the concomitant rise in social status, again regardless of relative quality considerations. The manufacturers of luxury cars, and owners of private schools have benefited from this psychological phenomenon of 'conspicuous consumption'. 2. Brand Loyalty : An extensive advertising campaign could seek to establish the brand on the market, and build up a loyal consumer following. Well-known branded goods will generally be capable of sustaining a premium over nonbranded goods, thus justifying the heavy initial promotional expenditure. 3. Quality : If a supplier can convince the consumer that his product or service is of better quality than those of his rivals, then a higher price can be justified. This is perhaps the most obvious case of premium pricing. Needless to say, this better quality' can be either real or perceived, with the help of appropriate advertising in the latter instance. A successiul extension of this is demonstrated by the 'produced in limited quantity only' market: advertising can exploit the production of goods in limited quantities, by implying that the small numbers are the result of a conscious policy to maintain the highest of standards in manufacture - and incidentally supporting the price premium with the added attraction of scarcity value. 4. Reliability : Most customers are willing to pay more for goods which are seen or perceived to be more reliable than the general run. This particular characteristic will often be subsumed under the more general 'quality' category in the company's marketing strategy. 5. Durability : If a particular good is likely to have a longer physical lie than similar items on the market, then it can justify a premium price. This characteristic, too, is often seen as part of the 'quality' picture. 6. After-sales service: This is really the converse of the previous two poins, with the same premium outcome for the supplier: in the absence of general reliability or durability, or a reluctance to pay a very high premium for those goods with that reputation, the ready availability of spare parts or servicing facilities can be translated into a higher sales price than would otherwise be the case. 7. Extended warranties : If a supplier is prepared to offer a longer warranty period for his particular product than that offered by rival suppliers with comparable products, he can usually rely on the innate conservatism and riskaversion of the public to justify a price premium. 8. Geographical location : As many consumers know to their cost, and many suppliers to their benefit, geographical location will affect prices. For example, retailers will often charge premium rates for goods and services sold in rural and outlying areas. The difference is due not only to higher transportation costs, but reflects the lack of competition in such areas, and thus the customer's inability to 'shop around'.