What is the goal of rate-of-return pricing?

The goal of rate-of-return pricing is to achieve a pre-specified rate of return on investments. This pricing strategy is used by businesses to ensure that the prices they set for their products or services will cover costs while also providing a targeted return on investment. This approach is particularly important for companies that want to factor in their costs, risk, and desired profits into their pricing strategy.

By setting prices based on the expected return, businesses can better align their pricing strategy with their overall financial goals. This means that the pricing not only needs to cover the cost of production but also must contribute to the profitability objectives set by the company. Rate-of-return pricing is often employed in industries with significant investments, where the return on investment is a critical measure of success.

In contrast, strategies focusing on minimizing costs, customer feedback, or achieving maximum market share might prioritize different business objectives, such as competitive positioning or customer satisfaction, without necessarily aiming for a specific investment return.