Businesses and companies use various methods to determine the price of their product. Usually, they set the price based on the cost of production, and add some profit margin, and then it’s a sale price. Some other businesses set the price long before knowing the cost of the product. Today’s we’ll discuss target pricing strategy, why businesses follow it, its pros and cons with examples.
What is Target Pricing?
Target pricing strategy is the process of calculating the market competitiveness and adding a standard profit margin on the retail price so that the firm would estimate the maximum cost of the new product. Now, the designers and manufacturers have to create the product along with the required features within the pre-decided cost limits. If they can’t create the product within the cost limits, then the project is finished.
Targeting pricing strategy allows businesses and companies to earn a maximum profit margin of the product line, and it avoids the lower profit margin. If the company sets up a high-profit margin, then it won’t be possible to launch the product by remaining within the cost limits.
For instance, a clothing company XYZ is planning to launch prom dresses for young high school girls. The market sale price of the prom dress is 100 dollars. Now, the XYZ Company sets an up-scale price of 120 dollars.
If the desired markup is 25% per dress, then the profit margin would be 30 dollars. It means that XYZ Company has to prepare the product within the cost limit of 90 dollars. Now, the company has to make sure that the cost shouldn’t exceed the pre-set limit of 90 dollars. If the company manages to manufacture the product lower than the pre-set cost, then it would increase the profit margin.
The Goal of Target Pricing Strategy
The objective of the target pricing strategy is to plan, design, and manage your resources in order to decrease the cost. The focus of this model should be on the market and competition. Instead, it focuses on price, delivery of the product, functions, features, and customers’ needs and wishes.
They both are important. But the company needs to maintain a balance across the organization. In case of any problem, then the team should have the capabilities to handle it. The other goal is to earn a profit, re-invest it, and increase it more.
Nowadays, businesses and companies have sufficient resources and tools to come up with a productive pricing method. However, it would a lot of effort, financial resources, and strategies to establish an effective strategy.
Who Uses of Target Pricing Strategy
The question is what types of businesses and companies follow the target pricing strategy. In an intensely competitive business environment, elastic pricing would give you a competitive edge in the market. The elastic price demand means that the demand would change depending upon the price change. If the price of the product increases, then the demand would decrease, and vice versa.
If a business wants to avoid the negative impact of the demand, then it has to set a retail price that’s acceptable in the market. Japanese companies like Nissan and Toyota gave rise to the popularity of the target pricing strategy.
Advantages of Target Pricing
Some of the main advantages of the target pricing strategy are as follows;
- It’s a dynamic pricing method that focuses on the factors that impact the demand of the product while finding out the asking price of the market.
- It allows companies and businesses to earn a higher profit margin by lowering the production cost because they’ve already fixed the cost price.
- It makes companies supply value-added services to the product for the benefit of customers. It happens often that businesses manage to deliver better products and services while reducing the cost, and customers would relish the optimum product at a lower price.
- The market environment decides the retail of your product/service; here you take price instead of making it.
- Cost reduction is the difference between the current market cost and the target cost that you’ve planned to achieve.
- When you set up a retail/sale price, it already includes customer expectations, demands, and product design.
- The target retail price also comprises of minimum profit margin.
- Cost efficiency and cost reduction management are very important parts of the strategic management process.
- It compels businesses and companies to establish a management team that would handle various departments ranging from designing, manufacturing, and marketing in order to decrease the cost.
- When a company follows a target pricing strategy, then it means that it has all the strategies and tools. In other words, it allows them to develop coordination among different departments. It would bring major changing trends in the company that leads toward profitability.
- Customer expectations, product design, features, and specifications are already included when setting up the retail price.
Disadvantages of Target Pricing
Some of the main disadvantages of the target pricing strategy as follows;
- The target price heavily relies on the price of the goods, it could lead towards failure in case of any small error.
- When you’re calculating a very low-cost price while managing the inflexible retail price, then it puts a lot of pressure on different divisions to manage expenses,
- It compels businesses towards economies of scale and they lose track of the latest trends.
- The companies and businesses follow the manufacturing and designing approach relevant to the market.
- When companies realize that they could increase their profitability by increasing the sale; then they would end up compromising on the quality of the product by using cheap material and faulty design. It results in the form of loss.
- It’s important to know the worth of saving so that you have the value of money in order to exploit new opportunities in the market.
- The calculation of target retail price should be relevant to the needs and wishes of the customer. They should also work on the quantity of the products they have to sell in order to achieve profitability. The problem arises when the company couldn’t sell the required number of total products.