Build-in or improve margin over a product/service lifecycle
When you set, and meet, a target cost the impact is significant:
- more products/services contribute more to margin
- fewer products/services are loss-makers
Getting costing right is an essential investment in financial success. Failure to do accurate costing is a recipe for disaster if selling at less than cost price or the sales effort is focused on low margin /ow volume products.
Which of your products/services contribute most to margin?
Which products/services are loss-making?
How significant is sales volume to the answer to both these questions?
Target costing is not cost reduction or expense reduction as these ‘school of hard knocks’ case studies confirm:
- Boeing – outsourcing on price, not quality or service, at great cost to revenue and the industry
- Carlton & United Breweries – removing valued features and benefits at the cost of market share
- Victorian Government – a ‘budget anchor’ undermining clear objectives to quarantine from Covid-19
Target Cost is determined by subtracting the desired profit margin from a competitive market price to:
- monitor a product’s contribution to profit throughout the product life cycle
- achieve target profitability as an investment in improved financial performance
- make an informed response to changes in market price in full knowledge of internal costs
- identify sales target required to transform Gross Margin Estimates to banked dollars and profit
- retain valued features and explore opportunities to change less valued components to improve profit