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.
Leave a Reply