Target return on investment (ROI) pricing

Pricing strategy is the policy a firm adopts to determine the price that yields its target rate of return on investment. Price is an important factor in the success or failure of a business. It helps establish and maintain a firm’s image, competitive edge, and profits.

In industries that require a high capital investment such as automobile manufacturers and telecommunications, electricity, and gas service providers, target return on investment pricing is adopted as a safeguard to recuperate the costs of setting up complex infrastructure. It is a method wherein the firm determines the price in such a way that it ultimately helps organizations in achieving the ultimate goal or return on the capital employed.

The formula used to calculate the price includes a percentage return on investment that varies with different volumes of production in a given period. The price is set to such a degree that the ultimate goal of achieving corporate profit objective is met if sales continue to run at a given rate.
Target return on investment (ROI) pricing