Professional Documents
Culture Documents
The "return on investment" pricing method determines the price of a product based on the target
return on the amount invested in a product. Target return pricing method involves (1)
identifying the price at which a product will be competitive in the marketplace, (2) defining the
desired profit to be made on the product, and (3) computing the target cost for the product by
subtracting the desired profit from the competitive market price. The formula is:
Unit Price
25,000 units
45
25
550,000
350,000
4 years
225,000
575,000
costs)
The required annual profit = 575,000 x 25%
143,750
1,750,000
87,500
550,000
2,387,500
Total required annual revenue = total annual costs + required annual profit
2,531,250
101.25
The use of a targeted return on investment to determine price has the following advantages
in marketing:
- Consistent with other performance measures - e.g. Return on Investment
- A suitable method for market leaders which are able to set a price which competitors follow
- A relevant pricing method for new products - particularly those which have a substantial
investment.