This pricing technique goals to attain a particular proportion return on funding (ROI). An organization calculates its desired revenue margin based mostly on complete prices and invested capital. As an illustration, if an organization invests $1 million in growing a product and wishes a 20% ROI, it would value the product to generate $200,000 in revenue.
Setting profitability targets gives a transparent monetary course, permitting companies to evaluate the viability of merchandise and initiatives. This strategy promotes monetary stability and sustainable development by making certain that investments generate sufficient returns. Traditionally, companies in search of predictable profitability have favored this technique, particularly in industries with steady markets and comparatively predictable prices.