What is Target Return Pricing? Definition, Examples, and Pros/Cons

What is Target Return Pricing?

Target Return Pricing is a pricing method used to calculate the price for a product that will ensure a desired profit or rate of return on investment, assuming a specific quantity of the product is sold. It involves setting the price based on the expected rate of return on the investment, which is often referred to as Return on Investment (ROI). This approach is commonly used in industries like e-commerce.

To implement Target Return Pricing, a company calculates the amount of money invested in business activities and then determines the profit it expects to achieve, considering a particular quantity of products sold. The formula for Target Return Pricing is TRP = Unit Cost + (Desired Return x Invested Capital) / Unit Sales.

While this strategy can help a company reach its financial goals, it requires careful market analysis and pricing decisions based on ROI. It’s a method that aims to strike a balance between profitability and market demand.

Objectives of Target Return Pricing

The objectives of Target Return Pricing are:

  • Profitability: To achieve a desired level of profit or return on investment, ensuring the company’s financial goals are met.
  • Investor Satisfaction: To satisfy the expectations of investors or stakeholders by providing the expected return on their investments.
  • Competitiveness: To set prices that are competitive in the market while still meeting the desired rate of return.
  • Cost Efficiency: To encourage cost-efficient production and resource utilization to maximize profits.
  • Market Responsiveness: To adjust prices in response to market changes, ensuring the desired profitability is maintained even as market conditions fluctuate.

Pros of Target Return Pricing

Let’s explore the 5 key pros of target return pricing:

Profit Precision

Target return pricing is like having a roadmap for profits. It helps businesses accurately calculate how much money they want to make and then sets the price to achieve that goal. It’s like aiming for a bullseye, and when you hit it, you know you’ve got the profit you wanted.

Investor Happiness

Investors are like your financial cheerleaders. With target return pricing, you can ensure you meet their expectations for returns on their investment. Happy investors mean more support for your business.

Read More: The 10 Importance of Pricing in Business

Smart Competition

It’s like playing chess in the business world. Target return pricing lets you set prices that not only compete well with others but also secure the profits you desire. It’s a bit like saying, “I’ll win this chess game and make my money too.”

Efficiency Boost

Think of your business as a car. With target return pricing, you’re fine-tuning the engine to be super fuel-efficient. It encourages you to be smart with costs, so you make more money without wasting resources.


The business world is a bit like a roller coaster, with ups and downs. Target return pricing is your safety harness. It lets you adjust prices when the market goes up and down, ensuring your profits stay on track even when the ride gets bumpy. It’s like always having a plan, no matter what twists and turns come your way.

Read More: 10 Factors Affecting Product Pricing

Cons of Target Return Pricing

While target rate of return pricing offers various benefits, it also has some drawbacks. They are:

Misjudgment Risk

Imagine aiming at a target in the dark. One of the downsides of target return pricing is that if you misjudge the market conditions or customer behavior, you might miss the mark and fall short of your profit goal.

Unrealistic Cost Pressures

Think of your business like a cake recipe. Target return pricing can sometimes make you cut corners and skimp on quality ingredients. The pressure to meet profit targets may lead to cost-cutting that could compromise your product or service quality.

Read More: The 3 Objectives of Pricing in Marketing

Price Wars

Picture a competitive game where everyone tries to lower their prices. Target return pricing can sometimes lead to price wars, where companies keep slashing prices to meet profit goals. It’s a bit like a never-ending game of limbo, where the lowest price wins, but it can hurt everyone’s bottom line.

Business Risks

Consider target return pricing as a tightrope walk. If external factors change, like a sudden increase in production costs or shifts in customer preferences, it can throw off your balance. You might not reach your profit target, risking financial stability.

Examples of Target Return Pricing

Let’s explore an example of target return pricing to see how it works in practice.

Imagine you’re running a small business that produces handmade candles. You’ve invested $10,000 in your venture, and you’re looking to achieve a 30% return on your investment (ROI) within one year. Your production cost per candle is $5, and you expect to sell 2,000 candles during that year.

To calculate the target return price, you’d use the following formula:

Target-Return Pricing = Unit Cost + (Desired Return x Invested Capital) / Unit Sales

In this case:

  • Unit Cost (UC) = $5 (the cost to produce one candle)
  • Desired Return (DR) = 30% (0.30 in decimal form, representing your ROI)
  • Invested Capital (C) = $10,000 (the initial investment)
  • Unit Sales (US) = 2,000 (the expected number of candles to be sold)

Now, let’s put these values into the formula:

Target-Return Pricing = $5 + (0.30 x $10,000) / 2,000

Target-Return Pricing = $5 + $3,000 / 2,000

Target-Return Pricing = $5 + $1.50

Target-Return Pricing = $6.50 per candle

To achieve your desired 30% ROI, you need to set the selling price of your candles at $6.50 each. This price takes into account your production costs, desired profit, and the number of candles you expect to sell.

If you meet your sales target, you should reach your investment return goal. However, keep in mind that external factors, such as unexpected expenses or changes in market demand, can affect your ability to achieve this target return.

Read Next: Markup Pricing – Definition

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