Target Return Pricing Explained
Target return pricing is a price opimisation method normally used by big companies, market leaders and monopolists in the industry. Unlike other pricing strategies used by businesses, target return pricing works in reverse – working out product prices backwards based on desired sales targets and estimated demand. Basically, you set your product prices based on achieving your target rate of return.
This particular dynamic repricing strategy is rather complicated and risky, hence rarely used for price optimisation by average businesses.
How To Work Out Prices Based On Target Return Pricing
To reprice according to target return, you need to have a rate of return objective in mind. This could be either the full amount, or a percentage of estimated sales revenue to cover a return of your investment. Let’s break the pricing formula down:
- Firstly, work out your Target Return Objective. This can be calculated either as the total amount of money invested, or as money invested plus profit.
- Work out the time period that you want to make back your target return within. Obviously it will be much more difficult to make a high return over a shorter period of time.
- Next, you need to have an accurate estimate in mind of your expected sales volume within this time frame. This depends greatly on public demand and competition.
- Divide your target return on investment amount by your expected sales volume amount and you have your required profit value for each unit. So, let’s say each unit costs £50 in production costs etc – if you have invested £10,000 into your business and you expect to sell 1000 units, you will need to make £10 profit back on each unit. You will therefore need to price your product at £60 per unit.
Target return price = Unit cost + (Target return/ estimated sales volume)
You can read more about pricing strategies and dynamic repricing methods here.