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Rate Of Return Pricing Methodology

In the earlier article, we have dealt with the importance of making the correct pricing decisions and the factors to consider before making a pricing decision.

This article refers to the various methods of pricing which include the following:

  • Full Cost Plus pricing;

  • Variable/Marginal Cost Plus pricing
  • Rate of Return Pricing;
  • Break-even Pricing;
  • Minimum Pricing;
  • Standard Cost Plus

 

Salient Points on Rate Of Return Pricing:

 

  • For this type of pricing, the company needs to specify the rate of return on its capital invested;

  • Similar to Cost plus pricing the difference is that the  marked up will be based on the target rate of return;

  • The target rate of return varies with market norm or what management considers a fair return.

  • Useful method to use when a business has invested too much on the project or products

  • However, difficult to use where a company has too many product lines or competes in many markets

 

 

Simple Illustration:

Capital invested / employed  $2,000,000

Target return  10%

Estimated costs $500,000

Mark up

= 10% x $2,000,000

       $500,000

=40%

 

 

This entry was posted on Monday, October 15th, 2007 at 9:25 am and is filed under 4. Pricing Methodology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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