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What is Target return pricing?
In target return pricing, price is determined based on the rate of return targeted on investment. Desired Return is also called Return on investment. This type of method is used in e-commerce.
In this, selling price is determined with insights of the market department, other data and customers willing to pay. Now, targeted profit is deducted from the selling price and resulting amount tells about the limits of production cost.
Formula
The formula for target return pricing is as follows −
TRP = UC + (DR*C)/US
Here, TRP = Target-Return pricing, UC = unit cost, DR= Desired return, C = invested
capital, US = unit sales
DR = ROI
ROI = (IG – IC)/IC
Here ROI = Return on investment, IG= Investment Gain, IC = Investment cost
Advantages
The advantages of the target return pricing are as follows −
Advantages
The advantages of the target return pricing are as follows −
- Dynamic price determination is considered.
- High profits.
- Optimal usage of resources.
- Provides value added products.
- Cost reduction.
- Responds to market changes.
Disadvantages
The disadvantages of the target return pricing are as follows −
- Miscalculations may lead to strategy failure.
- Sometimes the cost is unrealistic.
- Technology usages according to price.
- Lower prices may affect the company in the long run.
- Losses may occur, if business fails.
Example
If a manufacturer wants to start a pencil manufacturing business with initial invested Rs.1000000/- in expected return on investment 25%. Assuming 25000 sales with manufacturing cost = Rs. 5/unit. Calculate target return price.
Solution
The target return price for the above data is calculated as follows −
TRP = UC + (DR*C)/US
Here, TRP = Target-Return pricing, UC = unit cost, DR= Desired return, C = invested
capital, US = unit sales
TRP = 5 + (0.25*1000000)/25000
TRP = 5 + 10
TRP = Rs. 15/-
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