This pricing strategy aims to achieve a specific percentage return on investment (ROI). A company calculates its desired profit margin based on total costs and invested capital. For instance, if a company invests $1 million in developing a product and desires a 20% ROI, it will price the product to generate $200,000 in profit.
Setting profitability goals provides a clear financial direction, allowing businesses to assess the viability of products and projects. This approach promotes financial stability and sustainable growth by ensuring that investments generate adequate returns. Historically, businesses seeking predictable profitability have favored this method, especially in industries with stable markets and relatively predictable costs.