Question

There are four common approaches to selecting an approximate price level. List and provide a brief description for each one.

Answer 1

Price level

The measure of the market prices by considering the entire prices of certain group of products as well as services prevailing in an economy at a specific period is known as price level. Daily price index, either called as Daily CPI is the indicator of normal price level.

Basically, there are four common approaches to estimate an approximate price level. They are:-

• Demand-oriented approach
• Profit-oriented approach
• Cost-oriented approach
• Competition-oriented approach

1.) Demand-oriented approach

The methods coming under this approach are price skimming, penetration, odd-even, prestige, yield management, bundle, target and price-lining. The desired price of customers are called skimming price. The least starting price of a product is penetration pricing. Price to the status-based customers are prestige pricing. Price fixing to a product line is called price-lining.

2.) Profit-oriented approach

The methods coming under this approach are target profit, target return on investment and target return on sales. Here, sales will be targeted for earning a fixed profit.

3.) Cost-oriented approach

The methods coming under this approach are cost-plus which means adding a fixed profit to a product, experience curve which means putting price based on research and standard markup which means adding a fixed percent of profit to cost of a product group.

4.) Competition-oriented approach

The methods coming under this approach are loss leader, customary, above or below market.