How to use the target cost method to define the ideal price of your products?
Target Cost Technique is a manner in which companies use to determine the price of the product based on the cost of production and the desired profit margin.
This concept arose in Japan in the 1960s in response to the need for companies, especially in the automotive sector Competitive Without losing quality.
This method has been received by v due to its capacity Maximumization of profitEspecially in high competitive markets. In addition to confirming financial stability, target cost companies allow companies to strategically accelerate their products, taking into account the product viability and value attached to the user.
How can target cost technology help to define the ideal price?
The target cost technology begins with the desired sales prices, which means that the company is worthy of fairness for production in the market. From there, the profit margin required to determine the maximum permitted cost (target cost) that can reach the product without compromising the profitability of the product is removed.
For example, if a company decides that the ideal price of a product is $ 200 and a 20%gain margin, the target cost is calculated as 80%(R $ 200 x 80%), that is, R $ 160.
The advantages and disadvantages of using this method
You need to understand the benefits and disadvantages you can bring before applying the method. Look and compare:
Benefits
- Cost Control: Technique allows for greater visibility Product costsCompanies can help identify where they can optimize their processes and reduce costs;
- Greater competitiveness: By determining the price-based price, companies can adjust their prices more strategically, making them more competitive in the market without sacrificing the profit margin;
- Planned profitability: This technology will definitely help calculate profitability, preventing future financial surprises.
Disadvantages
- Dependence on market estimates: The target cost technology depends on the proper assessment of the price of the sale, which can be challenged in volatile or high competitive markets. If the company underestimates the product value, it will compromise its profitability;
- The limits of the invention: When focusing on cost, there may be encouragement to reduce costs on product quality or innovations, which can affect consumer awareness;
- Complexity in implementation: For organizations that do not have well -structured cost management, implementing a target cost method can be an initial challenge, requires more time and resources.
Tips to apply the procedure
When using a target cast technique, it is also worth keeping surveillance on some of the tips to help. See:
- Find out exactly your product costs: Before defining any price, it is important to clearly understand all the costs in production production from raw material to labor and energy and transport;
- Search the market and competition: Define the price of competitive sales and taking into account the market prices and the user’s perceived value. It helps to ensure that the target price is realistic;
- Adjust your profit margin targets: Considering its financial goals and market conditions, any profit to the company is viable and desirable;
- Look for activity capacity: Look for ways to optimize production processes and reduce costs such as supply chain improvements or technical investments that increase productivity;
- Periodically reviewed: The market is constantly changing, and the company must modify its price strategy regularly, in accordance with new economic conditions and competition.
Why do you need to know this?
It is crucial to understand how to use the target cost technology for any founder who is trying to optimize their processes and to ensure the benefit of their products. By adopting this policy, companies can balance costs and prices more effectively, allowing strategic adjustments according to market dynamics.
In addition, the procedure helps to make information decisions on where to reduce costs without compromising quality, ensuring that the company is competitive and profitable.
