by OverHeadWatch Team | Sep 8, 2017 | Cost Reduction, Library
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The target pricing strategy is the structure approach that determines the price at which a proposed product of a determined quality and functionality should be produced in order to yield the desired profits at the anticipated selling price. So, the important note to take home in this definition is that it emphasizes the fact that target pricing is more than just a management accounting technique. Rather, it is a critical part of the comprehensive management process which aims at assisting a company to survive in an environment that is getting increasingly competitive. The target pricing strategy is an attempt at reducing the costs of a product’s life-cycle.
Moreover, target pricing is a methodical procedure that applies data and information in a systematic series of steps to predict and achieve a target price for the product.
How the Target Pricing Strategy Matches a Product’s Features
Of course, this is all possible when in line there is also a viable market price:
- Determination of an estimated price range for the product’s features and benefits;
- Cutting the desired profit from the estimated market price to figure out the costs of production;
- Revising the product design by removing unnecessary features whose costs cannot recover immediately;
- Determining the market price for that product.
Stages of the Target Pricing Strategy
- Conduct a market survey in order to find out which products are in the market, which new products are being brought in by the competition. Also, be sure of the customers’ needs and the price they will be willing to pay for the product.
- Determine the cost feasibility, price, and margin. The target price is determined based on the data got from the market research.
- Improve the product’s design so as to meet the margin target. It may not be possible to synchronize the product’s features with the proposed price range. Then, value engineering drives down the product’s cost to a level where the margin and target price are attainable.
- Make constant improvements of the product so that the target cost levels maintain. Value engineering assists in the elimination of wastage, misuse, and non-value added costs.
What Does the Target Pricing Strategy Aim to Achieve?
The aim of this process is to plan, manage, and reduce costs. It focuses its attention on understanding the competition and market. The strategy focuses on customers’ needs in terms of function, quality, and delivery; as well as the price. Additionally, it sees the importance of balancing trade-offs across the company, and designs teams that will address these issues early in the development stage. The core objective of the target pricing strategy is to make money, reinvest, and grow in value.
There are a number of tools and methods that facilitate an efficient and productive pricing process. The figuring out of the target profit margin heavily relies on the detailed and comprehensive statement analysis and financial planning. In every organization, there is a relationship between the volumes, prices, and revenues; investments and costs, for each line of products and even the individual products.
The Advantages of Target Pricing Strategy
- Encourages commitment from the top to the bottom in the process of innovating the product so that it achieves competitive advantages;
- Assists in creating a market-driven management that designs and manufactures products which meet the price that ensures market success;
- Supports and reinforces manufacturing strategies by the use of a management control system that identifies opportunities within the market. This can transform into better products that give the best value for money instead of just achieving the lowest price;
- Ensures that the products suit the customer’s requirements well;
- Is able to align the product’s features according to the willingness of the customer to pay for them;
- The product’s development cycle reduces significantly;
- The products’ costs reduce by a significant margin;
- Builds teamwork in the systems involved in the conceiving, planning, marketing, developing, manufacturing, distributing, selling and installation of the product;
- Involves the customers in the designing of the product.
Even though the target pricing strategy developed more than three decades ago, it was only in the 90s that it began being noticed. This is because the inventors of the strategy were the Japanese who tend to be very secretive about their affairs.
Target Pricing Strategy and Its Drawbacks
With all its glamour, the target pricing strategy has a few drawbacks that one should be wary of and guard against. They include the following:
- The development process can take quite long due to the design team’s frequent modification of the product and the strategy as they try to find the sweet spot. This mainly occurs when the design team is unwilling to detach themselves from a project that cannot meet the intended goals within the given time frame. When the market survey’s data reports are less than favorable, it is better to drop the project or put it on the shelf to be revisited at some other time.
- The compulsory cost cutting might cause bad blood between employees within different sections of the organization. This happens especially when one group feels as if they have contributed the lion’s share of the amount.
- The design team is usually made up of representatives from different departments. This can cause a conflict of interests because of the vast difference in opinions regarding the design issues.
These problems, however, are mostly superficial and can easily fix a good team leader’s presence that has strong control over the design team can easily fix them. This individual should:
- Have an impeccable understanding of the design process;
- Have good people skills;
- Commit to staying within both the cost and time budgets for the design process.
In the End
Based on the above, the target pricing strategy does work; quite well. However, it is a system that comprises of different entities that if not put together under the right conditions, may fail to work.
It is therefore important that the chosen team for design is able to function like a well-oiled machine for the project to be a success.
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