Target Costing

Target Costing is the process of actively searching for ways to minimize an offering’s costs to meet the predetermined strategic price and profit margin. Many companies take the reverse path: looking at their product’s cost, they add their desired margin to create their price. This usually leads to a price that is not attractive to the mass of target buyers. Here, price-minus costing, and not cost-plus pricing, is essential if one is to arrive at a cost structure that is both profitable and hard for potential followers to match. Target costing for companies executing a Blue Ocean Strategy is therefore generally more aggressive, because it forces companies to find innovative ways to reduce their costs. Part of the challenge of meeting the target cost is addressed in building a strategic profile that has focus, i.e. by reducing or eliminating key competitive factors the industry has taken for granted.