Market-Based Approach: Target Costing for Target Pricing

Learning Objective 3 Price products using the target-costing approach

• target costing identifies an estimated price customers are willing to pay and then computes a target cost to earn the desired profit

Market-based pricing starts with a target price, which is the estimated price for a product or service that potential customers are willing to pay. Managers base this estimate on an understanding of customers’ perceived value for a product or service and how competitors will price competing products or services.

Understanding Customers’ Perceived Value

A company’s sales and marketing organization, through close contact and interaction with customers, identifies customer needs and perceptions of product value. Companies also conduct market research on what customers want and the prices they are willing to pay.