Marketing Management

Professor Ashis Mishra

Pricing Methods

Illustration of Markup pricing and Target Return Pricing

1. Markup Pricing

Markup pricing is the most basic pricing method. Let us take the example of ‘breakeven
point’ to understand the mark up pricing method.

Say, we have the following data:

 Total fixed costs: Rs. 500,000

 Variable costs per unit: Rs. 300
 Sale price per unit: Rs. 500
 Expected unit sales: 5000

Now unit cost = variable cost + (fixed cost/ unit sales)

= 300 + (500000/ 5000)

= 300 + 100

= 400

Now assume that the manufacturer wants to earn 30% profit on sales. Then the mark up
price is given by:

Mark up price = unit cost / (1 – desired profit on sales)

= 400 / (1 – 30%)
= 400 / (1- 0.3)
= 400 / (0.7)
= 571.4
Thus, the manufacturer will sell for 571.4 rupees per product and make a profit of 171.4
per unit.

2. Target Return Pricing

In Target Return Pricing, the firm determines the price that yields its target rate of return
on investment.

Target return price is calculated using the formula:

Unit cost + ((desired return * invested capital)/ unit sales)

© All Rights Reserved. This document has been authored by Professor Ashis Mishra and is permitted for use only within the course
“Marketing Management”, delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data,
illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise – without the prior permission of the author.
 Marketing Management
Professor Ashis Mishra
Pricing Methods

Suppose the manufacturer has invested 15,00,000 rupees in the business and wants to
set a price to earn a 30 percent ROI, then the target-return price is calculated as follows:

Target return price = 400 + (.30 x 1500000)/ 5000

= 490

Target return and Markup pricing do not inherently take market behaviour or consumer
needs/wants into account

The result is a pricing strategy that is based on desired value for the producer/ marketer,
not expected / perceived value for the customer.

© All Rights Reserved. This document has been authored by Professor Ashis Mishra and is permitted for use only within the course
“Marketing Management”, delivered in the online course format by IIM Bangalore. No part of this document, including any logo, data,
illustrations, pictures, scripts, may be reproduced, or stored in a retrieval system or transmitted in any form or by any means – electronic,
mechanical, photocopying, recording or otherwise – without the prior permission of the author.