What is Target Pricing? Must Know Strategy and Benefits in 2020

Introduction

What is the selling price and how is the product calculated? The basic process of any business is to calculate all costs related to the production or procurement of the product. It is an approach that determines the product life cycle to incur costs developed with specific functionality and quality to ensure the desired profit. It helps achieve the desired profit margins with the calculation of selling price. It works differently in some companies. The price is determined first and then the cost is decided to keep the desired rate of return in mind.

1. What is Target Pricing?
2. Strategies of Target pricing
3. Which industries follow the target pricing? 
4. Advantages of Target Pricing
5. Major disadvantages of Target Pricing

1. What is Target Pricing? 

The target price meaning is to determine the product in the first place. Target pricing or target costing is not just a method of costing but a management technique. The prices can be determined basis the market conditions and other factors such as level of competition, cost switching, etc. The management would like to control costs when such factors are visible due to the reason, they have lea or no control over the costs. Based on the marketing department insights, many customers are willing to pay basis for the sales price. The profit margin is deducted from the selling price to calculate the cost within to produce the product or procure the product on the procurement department basis.

Let’s take an example for a better understanding of things. A manufacturer sets the average price of a particular suit for Rs. 1000. The selling price is fixed somewhere to Rs. 1200 for its up-scale range. The desired market price is twenty-five percent of the selling price. Hence, the profit margin will be Rs. 300 per suit. The manufacturer’s cost price would have been for every single suit be Rs. 900. To make the product line profitable the company assures that the cost price does not exceed Rs. 900. So, the lower the cost of making the higher the profit per suit. The target pricing can overcome the limitations of cost per pricing. 

2. Strategies of Target pricing

A target pricing strategy s an approach that determines the price for a product with determining quality in order to get the desired profits are a selling price. The target pricing definition lays the emphasis on the target price rather than management accounting technique. The target price methodical procedure that applies data and information to achieve the target price of the product. What does the target price aim to achieve?

The main aim of target pricing is to plan, manage and of course reduce costs. The focus and the attention of this model should be on the competition and the market. The strategy focuses on customer’s needs and requirements in terms of functions and quality, also in terms of delivery and price. It is very important to balance the trade across the company, and teams who can address the issues at a very early stage of development. The main objective of the targeting price strategy is to make more money, of course, also re-invest and grow more. 

These days companies use many tools and methods in order to facilitate the productive price process. It requires a lot of financial planning and strategies for the development of this strategy. There is a common relationship between price and revenues, volumes, investments and cost. 

3. Which industries follow the target pricing? 

The perfect target pricing example is the industries where the competition is more and demand pricing needs to have elasticity in target pricing which needs to be followed. It means that the level of demand changes according to the change in prices. If the price increases the demand decreases and vice versa. So, in order to control the negative outcome in which the demand falls and quoting a price that the market accepts. Now, which industries follow target pricing? the main examples of target pricing are Toyota and Nissan, which was made by the Japanese motor companies. 

4. Advantages of Target Pricing

The following are the advantages of target pricing: 

• It is a dynamic method of price determination that takes under consideration and responds to plug factors of demand and provide while determining the asking price.
• Target pricing leads to higher business profit by way of reducing cost because the asking price is already fixed beforehand.
• One of the advantages is to supply value-added products and services for the consumers for their benefit. There are various cases and times where the company passes on for cost reduction of the product which is when the customers enjoy better products at lower prices. 
• The price of the merchandise is decided by market conditions. the corporate may be a price taker instead of a price maker.
• The difference between the present cost and therefore the target cost is that the “cost reduction,” which management wants to realize.
• The product design as well as customer expectations are already included while deciding the selling price. 
• The minimum required margin of profit is already included within the target asking price.
• It is a part of management’s strategy to specialise in cost reduction and effective cost management.
• The company forms a team which handles different departments from designing to marketing to achieve their target cost. 
• With taking an immediate approach, the business is highly equipped with tools and strategies according to market standards. This can be approached with the help of coordination among various departments. This strategy can give a major shift in the trends to gain profit.
• Product design, specifications, and customer expectations are already built-in while formulating the entire asking price.

5. Major disadvantages of Target Pricing

The following are the disadvantages of target pricing:

• The target price totally depends on asking the merchandise price where the strategy can fail in case of small errors. 
• While estimating too low a value was at that point likewise fixing exceptionally inflexible requirements on expense may put the unreasonable weight on the gathering division.
• The company creates an economic scale with the passage of time and loosens on the latest trends. 
• The enterprises often give designing and manufacturing approach according to the market. 
• Sometimes the companies realize to earn more profit and make more sales, it ends up reducing the quality of the product with faulty designs and materials which in turn leads to loss. 
• To realize the value of money Newmarket opportunities are often rounded to savings to know the worth. 
• The computation should be on the desire of the customer to sell the product. The most important thing is to work on the quantity, the desire should be to sell those prices which achieve the maximum profit. The main loss is when the organization is unable to sell the number of units. 

Conclusion

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