Target pricing

Target pricing is the process of estimating a competitive price in the marketplace and applying a firm's standard profit margin to that price in order to arrive at the maximum cost that a new product can have. A design team then tries to create a product with the requisite features within the pre-set cost constraint. If the team cannot complete the product within the cost constraint, the project is terminated. By taking this approach, a firm can assure itself of earning a reasonable profit across its product line, without being burdened by any low-profitability products. However, if the standard profit margin is set too high, it may not be possible to develop very many products within the cost constraint.