Target Pricing

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Definition: Target Pricing

Target Pricing is a process of pricing in which the selling price of the product or service is determined first and then the cost is calculated by reducing the profit margin. The price which is used as starting target price is based on the highest competitive price in the market which customer might want to pay for that product or service.

Steps for Target Pricing

1. Determine the competitive price in the market

2. Determine the profit margin expected from the product

3. Calculate the cost by using 1 & 2 i.e. Expected Price-Profit

Importance of Target Pricing

Sometimes in certain markets, rather than calculating the price from the cost you incur it is more productive to first see how much price a customer would be willing to pay. The target pricing method is quite beneficial in these scenarios as the demand is very high. If the price is not in the range which the market would pay, the product or service would not sell.

if the company reduces the price under market pressure then it would lead to losses as the cost would be high and less prices would lead to loss or reduction in profit.

So if the target pricing method is followed properly then it would mean that the price would be in good range but costs would always be lower as they were reverse calculated from price itself and can help company to get profits in long term.

Example Calculation

Target Cost=Target Selling Price-Profit Margin Intended

Let us say if a company selling phones wants to sell in mid range of 500$ per mobile handset and they want to earn 100$ per phone as profit.

This would mean that their target cost would be 400$. Now if they are able to make the phone within the 400$ range then they would be profitable. 

Target Pricing

Advantages of Target Pricing

1. This method is pretty practical in nature as it keeps customer at the center of pricing rather than cost.

2. Target Pricing gives a heads up to the company while planning the product features so that the target cost is never exceeded

3. Target Pricing gives a close estimate of profitability and market share if the exercise is done properly to begin with

4. The company is in total control of the product or service

Disadvantages of Target Pricing

1. If the exercise was not correct done or evaluated it can lead to a big issue on the business front and can lead to losses

2. If the target cost comes down very low then it can mean that company might have to compromise on the product features even if it had the technology or expertise to add them to the product.

Hence, this concludes the definition of Target Pricing along with its overview.


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