Rate Of Return Pricing Methodology

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%