Question

Target Pricing (Cost and Profit Considerations)

How is target pricing significantly more complex and sophisticated than cost plus pricing? What’s involved in the “matrix” of costs, design, processes, market analysis, customer expectation, and profitability objectives? How is the process executed to optimize these relationships?

Answer 1

Target pricing significantly more complex and sophisticated than cost plus pricing as the cost plus method uses cost to determine price, target pricing works the other way around. It uses price to determine cost. In target pricing, a business starts by determining how much it wants to charge for a product. It then subtracts its desired profit from that price to arrive at the maximum cost it can afford to pay to produce that product. For example, assume again your business makes belt, and you want to introduce a new line. Your assessment of the market tells you that you shouldn't charge more than $15 per pc. If you desire a markup of 25 percent over cost, then you must be able to produce each pair for $11.25 or less. Target pricing recognizes that a business doesn't have total control over pricing; price is limited by what the market will pay. It also encourages or requires, even businesses to operate efficiently. Target pricing often requires a business to design its entire production process around meeting the cost. Thats a challenge for a business that doesn't have a dedicated development team. Target costing can also lead to corner-cutting using cheap materials or skimping on workmanship in order to get the cost down to the proper level.

A matrix can be used only for two different variables -

Cost Matrix are used for same type of cost with diffrent option to compare the cost efficiency.

Process matrix is a used for analyzing the the technological life cycle of process and product life cycle.

Market Analysis market is used for analysing which market to choose with the existing product or new.

Customer Expectation matrix involves diffrent expectation of consumer with the features of product.

Profitablity objective matrix involves deriving relationship of profit with the pricing of the product.

Process should be executed by determining the cost and pricing of the product as per expectation of coustomer of the targeted market with keeping in mind objectives of the business and designing the process for manufacturing and distribution.