This pricing strategy begins with a desired profit margin in mind. Companies calculate the necessary selling price to achieve that specific profit, considering fixed costs, variable costs per unit, and projected sales volume. For example, if a company aims for a 20% profit margin on a product with fixed costs of $10,000, variable costs of $5 per unit, and anticipated sales of 1,000 units, the selling price would be calculated to ensure this profit target is met.
Setting prices based on a predetermined profit objective provides businesses with financial clarity and control. It allows for proactive planning and resource allocation, facilitating informed decisions about production, marketing, and investment. Historically, this method has provided a straightforward framework for businesses to manage profitability in diverse market conditions, contributing to sustainable growth and financial stability.
