science

Rate of return pricing

Rate of return pricing is a science topic covered in the lgStudy science library. This page brings together a partial reference excerpt, illustrations, worked examples, real-world applications and a short study plan, so you can understand Rate of return pricing rather than just read about it. In short: Rate of return pricing or target-return pricing is a method by which a company will set the price of its product based on their desired returns on said product. The concept of rate return pricing is very similar to return on investment, but in this circumstance the company can manipulate its prices to achieve the desired goal.

Key takeaways

Rate of return pricing belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Rate of return pricing to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Rate of return pricing from memory before moving on to harder problems.

Reference excerpt

Rate of return pricing or target-return pricing is a method by which a company will set the price of its product based on their desired returns on said product. The concept of rate return pricing is very similar to return on investment, but in this circumstance the company can manipulate its prices to achieve the desired goal. This method is used primarily by companies that either have a lot of capital or have a monopoly on the market and when an investor requests a specific return on their investment. In a competitive market rate of return pricing can be a poor market strategy as its focus at the final profit margins and does not account for supply and demand factors. If a competitor is able to set a lower price, it could decrease demand for the product resulting in a lower sales then forecasted and failing to reach the desired profit margin.

Formula The formula is: Target-return pricing = unit cost + [(desired return on investment * invested capital) / expected unit sales]

Use Rate of return pricing enables firms to better assess the profitability of a product or service. It enables the cost of invested capital to be accounted when the setting price per unit and can be used to forecast the end monetary return of an exercise. It also helps the company in reaching certain profit goals' while maintaining liquidity. Additionally, if market conditions are stable, forecasts for returns will be extremely accurate as a certain target is being used in pricing achievements are solely dependent on sales.

References

Worked examples

Example 1 — a first encounter with Rate of return pricing

Start with the simplest possible case. Write down what Rate of return pricing claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Rate of return pricing before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Rate of return pricing ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Rate of return pricing

In research: Rate of return pricing appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Rate of return pricing in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Rate of return pricing is common in secondary-school and first-year university syllabi. It links to neighbouring topics Finance stubs, Financial ratios, Pricing, so understanding it makes those chapters shorter.
In everyday life: Look for Rate of return pricing outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

Ask Teacher Smith questions about this articleOpens your AI tutor with a question about “Rate of return pricing” →

Affiliate

Preply — study more efficiently by working with a personal tutor. 50% off.

How to study Rate of return pricing in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Rate of return pricing means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Rate of return pricing out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Rate of return pricing in simple terms?

Why does Rate of return pricing matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Rate of return pricing?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Rate of return pricing.