Definition of Target Pricing
Target pricing is a cost management and pricing strategy in which companies determine the desired selling price for a product or service based on market conditions, customer expectations, and the competitive landscape. The company then works backward to establish a target cost that allows them to achieve a desired profit margin. This approach encourages cost efficiency, innovation, and value creation throughout product development.
The primary purpose of target pricing is to ensure that a product or service is competitively priced while still allowing the company to achieve its desired profit margin. By focusing on market-driven pricing, companies can align their products and services with customer expectations and remain competitive in the marketplace.
Target pricing is vital in cost management, product development, and pricing strategy. It helps organizations identify cost-reduction opportunities, improve efficiency, and create customer value by delivering products and services at a price that meets market expectations.
The key components of target pricing include:
- Market-driven pricing: The desired selling price is determined based on market conditions, customer expectations, and the competitive landscape.
- Target cost: The company works backward from the target price to establish a cost that allows them to achieve a desired profit margin.
- Cost reduction efforts: Organizations focus on reducing costs through process improvements, innovation, and supplier negotiations to meet the target cost.
- Continuous improvement: Companies continually monitor and adjust their target pricing strategy to maintain competitiveness and profitability.
Target pricing is important because it encourages cost efficiency, innovation, and value creation throughout product development. By focusing on delivering products and services at a price that meets market expectations, companies can remain competitive and ensure long-term profitability.
Target pricing originated in Japan during the 1960s and 1970s, as Japanese companies focused on delivering high-quality products at competitive prices to gain market share in global markets. The strategy has since been adopted by many organizations around the world as a means of managing costs and remaining competitive.
- Aligns product pricing with market expectations and customer needs.
- Encourages cost efficiency and innovation throughout the product development process.
- Helps companies achieve their desired profit margins.
- Improves competitiveness by delivering products and services at market-driven prices.
Pros and Cons
- Helps companies remain competitive in the marketplace.
- Encourages cost reduction, process improvement, and innovation.
- Aligns product pricing with customer expectations and market conditions.
- Can create pressure to cut costs, potentially impacting product quality or employee morale.
- Requires accurate market analysis and forecasting to determine the appropriate target price.
- May be challenging to achieve target costs for complex or highly customized products.
- A consumer electronics company uses target pricing to determine the desired selling price for a new smartphone based on customer expectations and competitor pricing. The company then works backward to establish a target cost to achieve its desired profit margin, focusing on cost reduction efforts, process improvements, and supplier negotiations to meet the target cost.
- An automotive manufacturer uses target pricing to price a new vehicle model, considering market conditions, customer preferences, and competitor pricing. The company then establishes a target cost for the vehicle and works to reduce costs throughout the development and manufacturing process to achieve the desired profit margin.
In conclusion, target pricing is a cost management and pricing strategy focusing on market-driven pricing, allowing companies to achieve desired profit margins while remaining competitive in the marketplace. By emphasizing cost reduction, innovation, and value creation, target pricing helps organizations improve efficiency and deliver products and services that meet customer expectations.