Target return pricing is a pricing strategy where a company sets the price of its products or services to achieve a specific desired rate of return on investment (ROI). For example, if a company invests $1 million in developing a new product and aims for a 20% ROI, it will set a price that generates $200,000 in profit. This method necessitates careful consideration of projected sales volume and associated costs.
This approach offers a clear financial objective and facilitates long-term planning by ensuring profitability aligns with investment goals. Historically, its roots lie in industries with significant capital investments, such as manufacturing and utilities, where ensuring a predictable return on substantial outlays is critical. By tying pricing decisions directly to profitability targets, businesses can make informed investment decisions and effectively evaluate project viability.
