Rate of return pricing
Rate of return pricing is a pricing strategy used by businesses to determine the selling price of a product or service based on the desired rate of return on investment. This strategy takes into account the cost of production, overhead costs, and the desired profit margin.
For example, if a company wants to achieve a 20% rate of return on a product that costs $50 to produce, the selling price would be calculated as follows:
- Cost of production: $50
- Desired rate of return: 20%
- Selling price = Cost of production / (1 – Desired rate of return)
- Selling price = $50 / (1 – 0.20) = $62.50
Rate of return pricing allows businesses to ensure that they are making a profit on their investments while remaining competitive in the market. By adjusting the desired rate of return, companies can fine-tune their pricing strategy to meet their financial goals.
Overall, rate of return pricing is a useful tool for businesses to optimize their pricing strategy and maximize profitability.
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