Rate of Return Pricing

Rate of return pricing is a method used by businesses to set prices for their products or services based on the desired rate of return on their investment. This pricing strategy ensures that the company covers its costs and achieves a specific profit margin. The formula typically includes total costs (fixed and variable) plus the target rate of return on the investment or capital employed. It is commonly used in industries with high capital expenditures, such as utilities or manufacturing.

Example

A utility company calculates the price of electricity by considering its total production costs and adding a target 10% rate of return to cover its capital investments and generate profit.