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Rate of Return Pricing

 

DisciplinesMarketing > Pricing > Rate of Return Pricing

Description | Example | Discussion | See also

 

Description

Define your price based on some form of 'rate of return'. Ways to do this include as a percentage of:

  • Attributable product costs
  • Overall cost of business operation
  • Sales revenue
  • Capital investment
  • Bank rate

How often price is set may depend on how often knowledge about this basis changes. This may be annually, quarterly, monthly or even on an ongoing basis.

Example

A mineral company sets its prices based on a 10% rate of return above annual mining costs.

A service company borrows money to finance the company and sets its prices 5% above these costs.

Discussion

Fixing the price in this way takes no real notice of what customers are willing or able to pay. As such, it tends to be a method used when the company setting the price is not in a competitive situation, for example when they have a monopoly or customers are tied into contracts. It is also difficult to use this method in a situation of change.

This method may be preferred by those who seek certainty in their business model, for example accountants who just want a neat and predictable margin, rather than face an uncertain situation where profitability can be hard to determine.

While this method may be non-competitive, it could also result in potential profits not being made, for example where an innovative or fashionable product could be sold at a much higher price than that based on a relatively thin marginal load.

See also

Fixed Pricing, Target Pricing

 

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