Target Costing

Target costing is a formal process that attempts to mesh a proposed product's features (benefits) with a viable market price that achieves the company's profitability goals by:

(1) Determining a price point (or range of prices) for an approximate combination of features and benefits.

(2) Subtracting a desired profit from the market price to determine the maximum bearable level of costs.

(3) Iterating the product design - eliminating or reducing unnecessary attributes with costs that can't be recovered in higher prices - until the cost target is met.

(4) Revalidating the viability of the market price for the redesigned product.