{"id":931,"date":"2020-08-26T03:33:52","date_gmt":"2020-08-26T10:33:52","guid":{"rendered":"http:\/\/themanwhosoldtheweb.com\/blog\/?p=931"},"modified":"2020-08-26T03:33:57","modified_gmt":"2020-08-26T10:33:57","slug":"are-you-satisfied-with-cost-based-pricing-try-target-costing-an-effective-approach-to-pricing-products","status":"publish","type":"post","link":"http:\/\/themanwhosoldtheweb.com\/blog\/2020\/08\/are-you-satisfied-with-cost-based-pricing-try-target-costing-an-effective-approach-to-pricing-products\/","title":{"rendered":"Are You Satisfied With Cost-based Pricing? Try Target Costing &#8211; An Effective Approach to Pricing Products"},"content":{"rendered":"\n<div class=\"wp-block-image\"><figure class=\"alignright is-resized\"><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/themanwhosoldtheweb.com\/blog\/wp-content\/uploads\/2020\/08\/Costing-1024x683.jpg\" alt=\"\" class=\"wp-image-932\" width=\"336\" height=\"223\" srcset=\"http:\/\/themanwhosoldtheweb.com\/blog\/wp-content\/uploads\/2020\/08\/Costing-1024x683.jpg 1024w, http:\/\/themanwhosoldtheweb.com\/blog\/wp-content\/uploads\/2020\/08\/Costing-300x200.jpg 300w, http:\/\/themanwhosoldtheweb.com\/blog\/wp-content\/uploads\/2020\/08\/Costing-768x512.jpg 768w, http:\/\/themanwhosoldtheweb.com\/blog\/wp-content\/uploads\/2020\/08\/Costing.jpg 1920w\" sizes=\"auto, (max-width: 336px) 100vw, 336px\" \/><\/figure><\/div>\n\n\n\n<p>Cost-based Pricing is fast becoming a relic of the past and being substituted by the concept of <a href=\"https:\/\/flevy.com\/browse\/flevypro\/target-costing-5201\">Target Costing<\/a>. &nbsp;Target Costing is referred to as an organized process to determine the cost at which a proposed product must be developed so as to generate profits at the product\u2019s anticipated selling price in future.<\/p>\n\n\n\n<p>In highly competitive markets such as FMCG, construction, healthcare, and energy, prices are determined by market forces. &nbsp;Producers cannot effectively control selling prices. &nbsp;The only control, to some extent, is over costs, so management\u2019s focus has to be on influencing every component of product, service, or operational costs.<\/p>\n\n\n\n<p>Target Costing is a proactive Cost Planning, <a href=\"https:\/\/flevy.com\/business-toolkit\/cost-management\">Cost Management<\/a>, and <a href=\"https:\/\/flevy.com\/business-toolkit\/cost-reduction\">Cost Reduction<\/a> practice. &nbsp;Costs are planned and managed out of a product and business early in product life-cycle, rather than during the later stages. &nbsp;The fundamental objective of Target Costing is to make the business profitable in any competitive marketplace. &nbsp;Target Costing is widely used in several industries e.g. manufacturing, energy, healthcare, construction, and a host of others.<\/p>\n\n\n\n<p>Some key features of Target Costing are:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>Seller is a price taker rather than a price maker.<\/li><li>The target selling price incorporates desired profit margin.<\/li><li>Product design, specifications, and customer expectations are built-in while formulating the total selling price.<\/li><li>Cost reduction and effective cost management is the corner stone of management strategy.<\/li><li>Target Cost has to be achieved through team collaboration during activities such as designing, purchasing, manufacturing, marketing, and other activities.<\/li><\/ul>\n\n\n\n<p>Target Costing presents the following advantages over other product pricing techniques:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li>More value delivered to customer since the product is created keeping in mind the expectation of the customer.<\/li><li>Approach to designing and manufacturing products is market driven.<\/li><li><a href=\"https:\/\/flevy.com\/business-toolkit\/competitive-advantage\">Competitive Advantage<\/a> gained through process improvement and product innovation.<\/li><li>Drastic <a href=\"https:\/\/flevy.com\/browse\/stream\/process-improvement\">Process Improvement<\/a>, which creates economies of scale.<\/li><li>New market opportunities converted into real savings to achieve the best value for money rather than to simply realize the lowest cost.<\/li><\/ul>\n\n\n\n<p>The Target Costing process comprises 3 main phases.<\/p>\n\n\n\n<ol class=\"wp-block-list\"><li><strong>Market-Driven Target Costing<\/strong><\/li><li><strong>Product-Level Target Costing<\/strong><\/li><li><strong>Component-Level Target Costing<\/strong><\/li><\/ol>\n\n\n\n<div class=\"wp-block-image\"><figure class=\"aligncenter\"><a href=\"http:\/\/https:\/\/flevy.com\/browse\/flevypro\/target-costing-5201\"><img decoding=\"async\" src=\"https:\/\/flevy.com\/blog\/wp-content\/uploads\/2020\/08\/Target-Costing.png\" alt=\"\" class=\"wp-image-7291\" \/><\/a><\/figure><\/div>\n\n\n\n<p>Let\u2019s discuss the 3 phases briefly.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>1. Market-Driven Target Costing<\/strong><\/h3>\n\n\n\n<p>In this phase, Selling Price is determined by analyzing the entire industry value chain and all functions of the firm. &nbsp;The focus of this costing phase is on analyzing market conditions and determining the company&#8217;s&nbsp;Profit Margin&nbsp;in order to identify the &#8220;Allowable Cost&#8221; of a product.<\/p>\n\n\n\n<p>In this phase, the desired profit level is set on the basis of firm\u2019s strategy and financial goals, and is deducted from Selling Price to obtain Allowable costs.&nbsp; Intensity of competition, nature of customers, similar product introduction by competitors, and level of customer sophistication are the key factors influencing Market-driven Target Costing.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>2. Product-Level Target Costing<\/strong><\/h3>\n\n\n\n<p>In this phase, Allowable Cost only gives a ball-park figure of cost saving to be achieved. &nbsp;It has to be translated into Achievable Target Cost. &nbsp;This type of costing concentrates on designing products that satisfy the company&#8217;s customers at the Allowable Cost. &nbsp;The&nbsp;cardinal rule&nbsp;of&nbsp;Product-level Target Costing&nbsp;is to never exceed the&nbsp;Target Cost.<\/p>\n\n\n\n<p>The objective of this Target Costing phase is to create intense but realistic pressure on the product designers to reduce costs.&nbsp; Product Strategy (number of products in the line, frequency of redesign, degree of innovation) and product characteristics (complexity, magnitude of up-front investments, and duration of product development) are the key factors affecting Product-level Target Costing.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>3. Component- Level Target Costing<\/strong><\/h3>\n\n\n\n<p>The Component-level Target Costing settles the price at which a firm is willing to purchase the externally-acquired components being used in its product.&nbsp; This phase involves a cross-functional team that is tasked to reduce costs across all functions such as designing, purchasing, manufacturing, marketing, and other activities.<\/p>\n\n\n\n<p>The components cost history serves as the starting point for estimating the new component-level target costs alongside optimal selection of suppliers. &nbsp;A supplier-focused strategy is the key factor that influences Component-level Target Costing.<\/p>\n\n\n\n<p>Interested in learning more about how the <a href=\"https:\/\/flevy.com\/browse\/flevypro\/target-costing-5201\">Target Costing process<\/a> works and its key steps? You can <a href=\"https:\/\/flevy.com\/browse\/flevypro\/target-costing-5201\">download an editable PowerPoint on <strong>Target Costing<\/strong> here<\/a> on the <a href=\"https:\/\/flevy.com\/browse\">Flevy documents marketplace<\/a>.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><strong>Are you a Management Consultant?<\/strong><\/h3>\n\n\n\n<p>You can download this and hundreds of other&nbsp;<a href=\"http:\/\/flevy.com\/pro\/library\/frameworks\">consulting frameworks<\/a>&nbsp;and&nbsp;<a href=\"http:\/\/flevy.com\/pro\/library\/consulting\">consulting training guides<\/a>&nbsp;from the&nbsp;<a href=\"http:\/\/flevy.com\/pro\/library\">FlevyPro library<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Cost-based Pricing is fast becoming a relic of the past and being substituted by the concept of Target Costing. &nbsp;Target Costing is referred to as an organized process to determine the cost at which a proposed product must be developed so as to generate profits at the product\u2019s anticipated selling price in future. In highly [&hellip;]<\/p>\n","protected":false},"author":3,"featured_media":932,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[313,585,637,573,636,614,620,635],"class_list":["post-931","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized","tag-business","tag-cost-management","tag-cost-planning","tag-cost-reduction","tag-cost-based-pricing","tag-pricing-strategy","tag-product-pricing","tag-target-costing"],"_links":{"self":[{"href":"http:\/\/themanwhosoldtheweb.com\/blog\/wp-json\/wp\/v2\/posts\/931","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/themanwhosoldtheweb.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/themanwhosoldtheweb.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/themanwhosoldtheweb.com\/blog\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"http:\/\/themanwhosoldtheweb.com\/blog\/wp-json\/wp\/v2\/comments?post=931"}],"version-history":[{"count":1,"href":"http:\/\/themanwhosoldtheweb.com\/blog\/wp-json\/wp\/v2\/posts\/931\/revisions"}],"predecessor-version":[{"id":933,"href":"http:\/\/themanwhosoldtheweb.com\/blog\/wp-json\/wp\/v2\/posts\/931\/revisions\/933"}],"wp:featuredmedia":[{"embeddable":true,"href":"http:\/\/themanwhosoldtheweb.com\/blog\/wp-json\/wp\/v2\/media\/932"}],"wp:attachment":[{"href":"http:\/\/themanwhosoldtheweb.com\/blog\/wp-json\/wp\/v2\/media?parent=931"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/themanwhosoldtheweb.com\/blog\/wp-json\/wp\/v2\/categories?post=931"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/themanwhosoldtheweb.com\/blog\/wp-json\/wp\/v2\/tags?post=931"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}