We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is Rate of Return Pricing?

Jim B.
By
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Rate of return pricing is practiced by businesses that set specific goals for the capital that they spend and the revenue they wish to generate. A business can set prices to ensure that these goals will be achieved. The concept of rate of return pricing is similar to the investment concept of return on investment, except that the business owner can manipulate prices to help achieve this goal. This method of pricing is most effectively achieved when a company has little or no competition in the market, since the actions of competitors will likely affect the rate of return.

Just as investors wish to generate a certain amount of return on their investment, so to do businesses have ideal goals in mind for their income on the sale of goods and services. Both investors and businesses alike have to be concerned with the amount of risk involved with the capital they spend. Since the similarities are so obvious, many business owners take an investment-styled approach to how much their goods cost by practicing rate of return pricing.

As an example of how rate of return pricing works, imagine that a certain company has in mind a rate of return of 20 percent for the goods that they sell. Their first batch of 10 products cost them $1,000 US Dollars (USD) to manufacture. In order to reach their specified goal of a 20 percent rate of return, they must price each product at $120 USD each. By doing that, selling all 10 products will earn them a $200 USD profit, which is 20 percent of their initial $1,000 USD cost.

Of course, this example of rate of return pricing assumes that the company has no competition from other businesses peddling the same product. If there were competition, one of the other companies might sell the same product for a lower price. In that case the original business would have to react with lower prices itself or run the risk of selling none of its products.

Even if there is some competition, a company can still adjust prices using a rate of return pricing method. Company owners have to be aware of how much profits they need to sustain the business over a period of time, especially in the early stages of a business when costs might be higher. As a result, setting an expected rate of return is a good way for business management to keep a lid on extraneous costs and attempt to be as efficient as possible with the goods they sell.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jim B.
By Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own successful blog. His passion led to a popular book series, which has gained the attention of fans worldwide. With a background in journalism, Beviglia brings his love for storytelling to his writing career where he engages readers with his unique insights.
Discussion Comments
Jim B.
Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.