Target costing flips traditional pricing on its head. Instead of adding profit to costs, it starts with market price and works backward. This process helps companies design products that meet customer needs while hitting profit goals.
Implementing target costing isn't easy. It requires teamwork across departments, breaking down costs to component levels, and constantly improving designs. But when done right, it can give companies a competitive edge in pricing and profitability.
Target Costing Fundamentals
Market-Driven Pricing and Target Cost
Top images from around the web for Market-Driven Pricing and Target Cost Pricing Methods | Boundless Business View original
Is this image relevant?
Outcome: Pricing Considerations | Introduction to Marketing View original
Is this image relevant?
Putting It Together: Marketing Function | Principles of Marketing View original
Is this image relevant?
Pricing Methods | Boundless Business View original
Is this image relevant?
Outcome: Pricing Considerations | Introduction to Marketing View original
Is this image relevant?
1 of 3
Top images from around the web for Market-Driven Pricing and Target Cost Pricing Methods | Boundless Business View original
Is this image relevant?
Outcome: Pricing Considerations | Introduction to Marketing View original
Is this image relevant?
Putting It Together: Marketing Function | Principles of Marketing View original
Is this image relevant?
Pricing Methods | Boundless Business View original
Is this image relevant?
Outcome: Pricing Considerations | Introduction to Marketing View original
Is this image relevant?
1 of 3
Market-driven pricing determines product's selling price based on customer preferences and competitor offerings
Target cost calculated by subtracting desired profit margin from market-driven price
Target cost represents maximum allowable cost to achieve profit goals
Focuses on designing products to meet both customer needs and cost constraints
Differs from traditional cost-plus pricing by starting with market price and working backwards
Cost Gap Analysis and Value Chain
Cost gap measures difference between current estimated cost and target cost
Identifies areas for cost reduction to achieve target cost
Value chain analysis examines all activities involved in creating and delivering product
Breaks down product costs across entire value chain (design, production, marketing, distribution)
Helps identify opportunities for cost reduction in each stage of product lifecycle
Examples and Applications
Automotive industry uses target costing to design cars within specific price points (economy, luxury)
Electronics manufacturers apply target costing to develop competitive smartphones and tablets
Retail chains employ target costing to create private label products at desired price points
Fast food restaurants use target costing to develop new menu items that meet profit margin goals
Target Costing Implementation
Cross-Functional Teams and Cost Breakdown
Cross-functional teams bring together experts from various departments (engineering, manufacturing, finance, marketing)
Collaborate to identify cost-saving opportunities and innovative solutions
Cost breakdown structure divides total product cost into component and feature levels
Assigns target costs to individual parts and processes
Enables focused cost reduction efforts on specific areas
Design for Manufacturability and Continuous Improvement
Design for manufacturability focuses on creating products that are easy and cost-effective to produce
Considers factors like material selection, assembly processes, and component standardization
Aims to reduce production costs without sacrificing quality or functionality
Continuous improvement involves ongoing efforts to refine processes and reduce costs
Kaizen events and value engineering used to identify and implement cost-saving measures
Encourages regular review and optimization of product design and manufacturing processes
Implementation Strategies and Challenges
Requires strong commitment from top management to support target costing initiatives
Necessitates cultural shift towards cost consciousness throughout organization
Involves extensive supplier collaboration to achieve cost targets for components and materials
May face resistance from traditional cost accounting practices and departmental silos
Requires investment in training and tools to support target costing methodologies
Balances cost reduction efforts with maintaining product quality and meeting customer expectations