Target return pricing is a pricing strategy where a company sets the price of a product or service to achieve a specific desired rate of return on investment (ROI). A furniture manufacturer, for instance, might invest $1 million in new equipment and aim for a 20% ROI. They would then calculate the necessary profit margin and corresponding product prices required to generate $200,000 in profit, covering the investment cost and achieving the desired return.
This pricing method allows businesses to establish clear financial goals and develop pricing strategies aligned with profitability targets. By focusing on a specific return, companies can ensure sustainable growth and reinvestment opportunities. Its particularly useful in industries with predictable sales volumes and costs, providing a stable framework for financial planning and investment decisions. Historically, target return pricing has been a cornerstone in capital-intensive industries, enabling justified investment in new technologies and expansion while maintaining financial stability.