What Is Target Return?

A target return is a pricing model that prices a business base𒈔d on what an investor would want to make from a✅ny capital invested in that company.

Understanding Target Return

Target return is calculated as the money invested in a venture, plus the profit that the investor wants to see in return, adjusted for the time value of money (TVM). As a 澳洲幸运5开奖号码历史查询:return-on-investment (ROI) method, target return pricing requires an investor to work backward to reach a 澳洲幸运5开奖号码历史查询:current price.

One of the major difficulties in using this pricing method is that an investor must pick both a return that can be reasonably attained, as well as a time period in which the target return can be reached. Picking a high return and a short time period means that the venture has♔ to be much more profitable in the short-run than if the investor expected a lower return over the same period, or the same return over a longer period.

Target return can also be used to project the price a company should set on its product sales to generate a desired profit. This model presumes that the company will be able to achieve 澳洲幸运5开奖号码历史查询:the projected sales volume in order to reach the ta🌳rget return. If actual sales come up short, the pricing would have to be adjusted in order to achieve the target.

For instance, a flashlight company might set a target return of 15% on $10 million that was invested into the development of a new flashlight. The manufacturing cost per unit is $12, and the company🍌 expects to sell at least 70,000 units within the specified timeframe. That means each new flashlight would need to be priced at $33.43 and up to deliver the sought return.

The target return model differs somewhat from a cost-plus pricing stra🍌tegy, wherein the price markup is based on other criteria. The cost of producing the product is the main factor, with an additional profit mar𒐪gin created by setting the price higher. Time and expected volume of sales do not play a part in this price model. Instead, the company determines how much it wants to earn from the product it sells, without consideration of any investments into the company or the development of the product.

Another model, 澳洲幸运5开奖号码历史查询:value-based pricing, works from the opposite direction. This starts with the value the company assigns to the product and then works to adjust the costs of production to💎 achieve profitability.