This pricing strategy focuses on achieving a predetermined percentage return on investment (ROI). A company calculates the desired profit margin based on invested capital and sets prices accordingly. For example, if a company invests $1 million in a product and targets a 20% ROI, it would aim for a $200,000 profit. The price of the product is then set to generate enough sales to reach this profit target, considering anticipated sales volume and costs.
Setting prices based on desired ROI offers several advantages. It provides a clear financial objective, facilitating performance measurement and strategic decision-making. This method also promotes financial stability by ensuring profitability and allowing for planned capital reinvestment. Historically, this approach has been favored in industries with substantial capital investments, like manufacturing and utilities, although its use has broadened with increasing emphasis on data-driven financial management.