Rate of Return Pricing

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.

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.

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Rate of Return Pricing

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Discussion

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Quick links

Disciplines

Techniques

Principles

Explanations

Theories

And