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Target pricing: a In their quest to reduce manufacturing costs

marketing management and launch cars with predetermined targets, the
UK car manufacturers are turning to the Japan-
tool for pricing new cars ese price management tool (target pricing) for a
solution. Target pricing is a rigorous price man-
agement technique that helps prevent managers
from launching low-margin products that do
Ogenyi Ejye Omar not generate appropriate returns on investment.
However, its greater value lies in its ability to
bring the challenge of the marketplace back
through the chain of production to product
designers (Cooper and Chew, 1996). The logic
is to look at the future dimensions in the mar-
ketplace, mapping the customer segments and
targeting the most attractive consumer quad-
rants (see Figure 1). The manufacturers deter-
The author mine what level of quality and functionality will
Ogenyi Ejye Omar is a Research Reader and lectures in succeed within each market segment, given
Retail Marketing and Marketing Management at the School predetermined targets. The firm designs the
of Retail Studies, London College of Printing and Distributive sourcing, production, delivery processes and
Trades (LCPDT), The London Institute, London, UK. retail outlets that enables it to achieve its desired
profits at the set target. In effect, the manufac-
Abstract turer reasons backward from customers’ needs
Over the past 15 years, many UK car manufacturers have and willingness to pay a specific price instead of
learned that quality must be designed into cars before they following the flawed but common practice of
are manufactured – it is expensive, if not misguided, to create cost-plus pricing. Target costing ensures that
quality by inspection after the car has left the production line. success with the customers yields economic
Examines the rigorous cost management technique which success for the manufacturer, and greater oper-
helps prevent senior managers from launching low-margin ating margins for dealers.
cars which do not generate enough returns on investment. While target costing considers quality and
Finds that most UK-based car manufacturers employ the logic price separately, historically, price has been
of target costing as a marketing management tool to deter- considered an indicator of quality (Curry and
mine the prices of new car models. Suggests that before a Riesz, 1988). During the last decade, however,
new car is launched, senior managers must determine its this notion of proportional correspondence
ideal selling price, establish the feasibility of meeting that between price and quality has seriously been
price, and then control costs to ensure that the set price is questioned by Crosby (1979) and Hayes and
met. Reports the conclusive evidence that when target Wheelwright (1984), who claimed that improve-
costing works well, quantifiable hurdles are established in a ments in quality need not increase costs.
transparent process, and senior managers are more likely to Two elements are used by car manufacturing
commit themselves to what the statistical numbers show. firms as the basis for control and performance
measurement – the time base and the cost struc-
ture (money). Product mix, sales volumes,
capacity, efficiency, utilization and productivity
are measured by time. At the corporate level,
forecast activity levels, performance measures,
levels of investment and similar activities use the
money base. Hill (1995), emphasized the
importance of getting the correct links between
the time-based and money-based measures in
Pricing Strategy & Practice
Volume 5 · Number 2 · 1997 · pp. 61–69 terms of accuracy, and in terms of key factors
© MCB University Press · ISSN 0968-4905 associated with car manufacturing.
Target pricing: a marketing management tool for pricing new cars Pricing Strategy & Practice
Ogenyi Ejye Omar Volume 5 · Number 2 · 1997 · 61–69

Figure 1 The target pricing process

The price and cost management issues paradigm of wider social and economic phe-
addressed in this article are controlled by both nomena. Wells and Rawlinson (1994), attrib-
time and money functions within the firm. This uted the significance of the automotive sector to
paper highlights a number of areas that need to economic, organizational and environmental
be addressed from the point of view of car man- conditions prevailing in the UK. Dicken (1988)
ufacturing and retailing firms. It links the areas argues for industrial geography in the 1990s to
of new car pricing strategy with target costing embrace and integrate the separate traditions of
and illustrates some of the key issues that need enterprise geography and structuralism, while at
to be developed, and the essential direction the same time making a more powerful contri-
these improvements need to take. It shows the bution to the realms of business and economics.
ways in which target costing influences new car Criticisms levelled at the traditional price and
pricing strategy while drawing attention to the cost-management approaches in the UK have
essential nature of UK car distribution needs. become increasingly both vocal and broader
based. The decline in the UK motor car manu-
facturing industry makes such criticisms more
Literature review
relevant. Ferrara (1990), argued that the con-
The continuing interest in the UK car industry certed pressure for improvement has increased
is probably due to the way in which it is seen as a because of growing competition from other
Target pricing: a marketing management tool for pricing new cars Pricing Strategy & Practice
Ogenyi Ejye Omar Volume 5 · Number 2 · 1997 · 61–69

European and Japanese manufacturers. To differentiate between them. While higher vol-
assess the alternative strategies, car manufactur- umes may decrease costs and product prolifera-
ers need insights and, in the competitive climate tion may increase them, these essential trade-offs
of the 1990s, the pressure to make significant are rarely differentiated within the traditional
and speedy strategic responses has never been price and cost-management procedures.”
greater. Traditional pricing and costing meth- The use of traditional pricing and cost-
ods used by the UK car manufacturers do not management systems which are regarded as out-
provide enough information to help the decision dated, creates added costs in terms of labour
process. Davies et al. (1991), tracing the perfor- and overheads allocation. The problems of
mance history of traditional price and costing traditional full-costing techniques that rely on
systems employed by the UK car manufactur- an allocation formula to distribute cost elements
ers, rated them as being reactive. According to is unlikely to prescribe a true cost allocation
Hill (1989), what is needed is an executive solution. As a consequence, the product may be
response, developing proactively systems which de-emphasized or overpriced, while the margin-
fulfil the needs of the decision-making processes al-extensions of the product line and customers
necessary to meet the demands of today’s mar- served may be under-priced or over-emphasized
kets and competitive threats. in their importance. This may be true even
A survey of British car manufacturers by when a real competitive advantage exists for a
Davies et al. (1991), reported that in the previ- product while there is no comparable advantage
ous five years “significant revisions to price and in the extension coverage.
cost-management systems were cited by 68 per
cent of respondents.” The survey reported that
many of these revisions “were ‘traditional’ Research objectives
rather than ‘new’ cost-management Target pricing involves more than listing mone-
techniques”. The authors concluded that tary targets and projected margins. It is a highly
“introducing advanced price and cost-manage-
structured product development discipline,
ment techniques may not be the best improve-
adapted to such specific elements of a manufac-
ment for many producers.” They were con-
turer’s strategic positioning as new car pricing
cerned that developing basic systems will not
dynamics, car-complexity, life-cycle analyses,
give a company the insights it requires, for if
component suppliers and dealership relations. It
traditional practices provided what was needed,
requires manufacturers to make a series of deci-
then the essential criticism levelled against these
sions that include defining the car that customers
systems would not be widespread.
want, ascertaining the economics required for
In their attempts to improve the competitive
profitability, allocating targets to components
nature of their performance, car manufacturers
and identifying the gap between target prices and
are paying greater attention to a whole range of
initial projections of manufacturing costs.
improvements in quality, processes, inventory
The purpose of this study is to make a
holdings and workforce policies. All are essen-
number of critical observations about the
tial measures to effect change. Not only is the
level of response high, but the approaches are impact on car manufacturing of using target
challenging the very basis of previous practice. costing as a base for new car pricing. Since the
As Kaplan (1984), revealed, “during the financial systems in a firm can have a major
1970s, most UK car manufacturers used man- impact on a manufacturer’s ability to develop
agement control systems that were developed and maintain an effective competitive edge, the
decades ago for a competitive environment aim of target costing is to give car manufactur-
drastically different from that of today.” ers the ability to measure and assess their per-
Although, Davies et al. (1991), concluded other- formance accurately in relation to major com-
wise, Cooper and Kaplan (1985) observed that petitors. The study objectives, therefore, were
“when trying to assess the level of contribution to:
provided by each product as a prerequisite for • develop propositions about cost concepts; and
judging what steps to take, many companies find • examine the available evidence in support of
that the accounting information provided fails to the propositions.
Target pricing: a marketing management tool for pricing new cars Pricing Strategy & Practice
Ogenyi Ejye Omar Volume 5 · Number 2 · 1997 · 61–69

To accomplish these objectives, the previous Table I Number of new cars produced and net earning of UK-based car manu-
research literature was augmented by an facturers in 1995
exploratory investigation of car manufacturing
Number of Sales Percentage Net profit
cost management and pricing systems. Compa-
Company vehicles n share (£billion)
ny interviews were conducted using the free-
elicitation approach recommended by Zeithaml General Motors 7.146 596 23.2 1.65
(1988). This approach generated qualitative Ford 5.764 410 21.1 1.69
data which supplemented previous research and Toyota 4.695 52 2.7 0.97
served as a basis for the conclusion presented. Volkswagen 3.499 81 4.2 (0.75)
Nissan 2.982 91 4.7 (0.09)
Fiat 2.231 70 3.6 (0.74)
Research methodology Chrysler 2.159 5 0.3 1.61
In order to assess accurately the reasons for the Peugeot/Citroen 2.049 143 7.4 (0.17)
UK-based car manufacturers employing target Renault 2.041 120 6.2 0.12
costing as a management tool for pricing new Mitsubishi 1.832 10 0.6 0.13
cars, 12 leading car manufacturers producing Honda 1.828 45 2.4 0.19
and/or marketing new cars (General Motors, Mazda 1.460 16 0.8 0.02
Ford, Toyota, Volkswagen, Nissan, Fiat, Sources: Economist Intelligence Unit (1996); Automotive Management
Chrysler, Peugeot/Citroen, Renault, Mitsubishi, – market data (May 1996); Society of Motor Manufacturers and Traders
Honda and Mazda) in the UK were selected on (SMMT, 1996)
the basis of their market share. They have a
combined market share of 72 percent, sufficient
to influence the structure of new car marketing pricing, allocation of overheads to relevant areas
innovation in the UK (see Table I). of production and marketing, and how the final
In-depth personal interviews were held with price for a new car model was determined.
the managing director and the marketing director
of each firm. Open-ended questions pertaining to
issues such as the company’s knowledge and Analysis and interpretations
awareness about cost structures, overhead alloca- As is typical in exploratory studies using means-
tions and contributions per model were asked. end chains (Zeithaml, 1988), the data generated
Free-elicitation approaches were used to obtain were not numerical. Instead, the data were in
information about the cost-management systems the form of protocols and means-end maps for
(marginal, absorption and target) employed by
individual respondents. Patterns of responses
the manufacturers. These techniques included
and observed similarities across individuals
“triad sorts” and “laddering.” In triad sorts,
form the “results” of this exploratory study.
similar costing systems used in arriving at the
When combined with the descriptive data from
basic car price were divided into sets of three and
personal interviews, the observations and
respondents were probed for distinctions among
insights provide a framework for speculating
them. This initial process uncovered the impor-
about the concepts and their relationships. The
tant distinctions that respondents used to dis-
criminate among cost systems. The laddering analysis concentrated on evaluating the target
process, which followed the triad sorts, involved a cost-management process, operating parame-
sequence of in-depth probes designed to force the ters, market definition and target assessment
respondents up the ladder of abstraction. leading to reliable pricing strategies for new car
As these procedures had elicited successfully models. The four areas of target pricing are:
the more important higher levels of abstraction (1) Operating process:
in previous studies (Gutman and Alden, 1985), • not an exact science;
they were used to reveal the links among new • depends on the credibility of information;
car model attributes, quality and value. After • depends on the manager’s courage to
these indirect methods, managers responded to make difficult decisions;
open-ended questions covering such topics as • evolves all manufacturing and marketing
information needed to make judgments about team;
Target pricing: a marketing management tool for pricing new cars Pricing Strategy & Practice
Ogenyi Ejye Omar Volume 5 · Number 2 · 1997 · 61–69

• involves sharing responsibility across since target costing is integrative, responsibility

functions; for achieving targets must be shared across
• involves collaborative efforts with both functions. Over 70 percent agreed that to use
the dealers and the suppliers; target costing effectively, manufacturers must
• requires control through time and focus. treat their component suppliers and dealers as
(2) Operational parameters: partners both during the car design process and
• new cars are cost and priced before
when the car cost targets are set.
designed and developed;
• technological innovations tie new car
Operational parameters
costs to its design;
This study is about pricing and costing new cars
• model design is based on quality and
before being designed and developed. Evidence
value for money;
• investment returns are predetermined; gathered from the UK-based car manufacturers
• cost and volume are variable elements; who were questioned with respect to why they
• overhead allocation is functional and are only now using this process, expressed previ-
component unit based. ous lack of interest as: “…lack of involvement
(3) Strategic market definition: gave engineers and enthusiasts, who were unlike-
• an iterative process associated with car ly to see the whole picture, undue influence over
design; the manufacturer’s competitive position.”
• both consumers and competitors are of When senior managers tried to drive costs
equal, parallel concern; out of their operations (expose facts) by cutting
• prices are defined in terms of customer- staff, eliminating frills, out-sourcing or re-
perceived value and prestige; engineering downstream processes, they often
• customers are defined in terms of discre- discovered that as much as 70 to 80 percent of a
tionary income;
car’s costs were effectively inimitable after it left
• competition is defined in terms of total
the designer’s drawing board. As product and
transportation system;
process technologies have become more inte-
• targets are defined costs that must not be
exceeded. grated, a new car’s cost has become tied even
(4) Market focus: more strongly to its design.
• target is set against future profitability;
• target is a profit-management tool; Market definition
• target is also a cost-control tool; Almost 80 percent of the manufacturers ques-
• target ignores the traditional cost-plus tioned with respect to their marketing strategies
system of pricing; think that it is not enough to focus on the cus-
• target aids, directs and drives marketing tomers only because competitors are a parallel
strategy. concern. They defined competitors as “compa-
nies that make things similar to what we make”
The operating process which is the producers’ view of competition
Cooper and Chew (1996) have explained that within the UK motor car industry. On the other
target costing is not an exact science. They hand, the Japanese car manufacturers inter-
emphasized that it depends on credible data and
viewed for this research defined competitors
on managers who have the courage to make
from the customers’ perspective as: “I am about
difficult judgments. However, 78 percent of the
to make a new car purchase, so what are my
manufacturers using this method believe that
options”?. Nissan, for example, benchmarks
target costing is an iterative process that cannot
be separated from the ordinary push-and-pull of itself not just against car manufacturers but also
the car design process. Almost 60 percent against the various motor car component manu-
expressed the view that targets evolve as manu- facturers (Garrahan and Stewart, 1991). The
facturing teams seek to balance new car func- company understood that it was competing for
tionality, price, volumes, capital investment and consumers’ discretionary income against
costs. Others (35 percent) simply explained that makers of all other transportation systems.
Target pricing: a marketing management tool for pricing new cars Pricing Strategy & Practice
Ogenyi Ejye Omar Volume 5 · Number 2 · 1997 · 61–69

Assessing overall targets ultimate customer and on the real opportunity

Motor car manufacturers derive overall targets in in the market. Evidence suggested that leading
a number of different ways, but the purpose is Japanese motor car manufacturers have used
always the same: “to think rigorously about the target costing to their advantage, and have
future profitability.” Some Japanese manufactur- introduced it in the UK.
ers agreed to classifying target costing as a profit- Target pricing and costing ensures that devel-
management tool rather than as a cost-control opment teams bring profitable new motor cars to
tool applied by many other UK-based car manu- the UK market not only with the right level of
facturers. In both cases, however, the task is to quality and functionality but also with appropri-
assess and calculate the costs that must not be ate prices for the targeted customer segment. In
exceeded if acceptable margins from specific car alignment with the previous research conducted
models at specific price points are to be realized. in this area, all indications are that car manufac-
For many traditional UK-based manufacturers turers and component suppliers have come to
such as Ford, General Motors and Rover, this realize that it is a discipline that harmonizes the
order of logic represents a radical shift in thinking. labour of disparate participants in the develop-
Traditionally, the UK manufacturers perform ment effort, from designers, manufacturing
financial analysis associated with car development engineers, market researchers, component sup-
only after much of the development work has pliers to the dealers (Cooper and Chew 1996;
been done, and then only to determine whether to Davies et al., 1991; and Wells and Rawlinson
continue investment. In contrast to the Japanese 1994).
target costing system, a financial analysis done Nevertheless, although a preemptive and
early in the design process can accomplish much disciplined approach to costs has always been
more. It can tell design teams and general man- reasonable, it has not always been urgent, and
agers a great deal about what is required to make manufacturers do not usually undertake difficult
the car a success. As one management accountant tasks if the tasks are avoidable. In a structured,
explained: “…in both cases, the nature of the closed, UK economy, however, price and cost
analysis may be the same, but shifts in timing and targeting are no longer avoidable, largely
focus make a huge difference.” because of the erosion of important “first-
Similarly, another car manufacturer per- mover” advantages. In the past, many leading
formed a financial analysis (on the basis of cost- UK car manufacturers such as Rover, British
plus) to estimate a likely return on investment Leyland and Jaguar, for example, who led by
for a redesigned car launched under a single set technical differentiation, found that they could
of market conditions. The purpose of the analy- take a cost-plus approach to releasing new cars
sis, he noted, was to make senior managers because they anticipated profiting from serial
more comfortable with their decision to go generations of car models. They believed that
ahead. It was observed that: being first to market was most important; that in
…although the analysis aided the approval preparing to be first, design teams needed to
process, it provided little guidance to the design focus only on selecting and executing the appro-
team. It displayed no sensitivity to the fact that priate bundle of car attributes; and that ultimate-
conditions such as launch date, cost and volume,
ly, over several iterations of the brand, the mar-
are variable and that small changes matter.
ketplace would allow the manufacturer to earn a
In launching a new car model, any miss in cost reasonable return on total capital employed.
target would always be catastrophic no matter By that logic, when a new car model was first
how small a percentage, for example, “a 0.5 released, it might carry a comparatively high
percent error in cost target will eliminate a price considered affordable by only a small
return on the manufacturer’s investment of number of “leader users,” such as businesses
nearly £200 million.” hoping to turn a new technology to their advan-
tage or comparatively wealthy, adventurous
technophiles. Lead users would pay a premium
for the first-generation model and help create
Target pricing drives motor car development excitement for the new features; they would
strategy that focusses the design team on the even help establish the car model. The revenues
Target pricing: a marketing management tool for pricing new cars Pricing Strategy & Practice
Ogenyi Ejye Omar Volume 5 · Number 2 · 1997 · 61–69

from lead users would rarely cover the cost of market accept? What functionality will the
developing the model. Peugeot, for example, customers insist on in relation to what the com-
did not expect the first releases of its 405 model petitors are offering? In placing the customers’
to recover R&D costs. But the Peugeot manu- needs first, target pricing maximizes the prod-
facturer assumed that they would have time to uct’s total profitability, rather than minimizing
scale up to mass production and introduce its cost. Car manufacturers must try to under-
serially cheaper versions of products for increas- stand how and why the customers prefer cars
ingly broader segments of customers. Unfortu- the way they do. They must also try to under-
nately that did not happen because of severe stand how the competitors’ cars will evolve over
vertical competition from other manufacturers, time. This knowledge will help to drive the
and a new 406 model was launched instead to direction of future target pricing. The under-
replace the flagging 405. The mass market is standing of customers’ needs and the direction
usually the source of most profits and this of competition requires a thorough knowledge
applies to the UK car market. of the customers’ motor car shopping behavior
in each market segment.
Strategic orientation When the Japanese car manufacturers target-
The strategic assumption (first-mover) would ed the luxury car market in the UK, for exam-
be disastrous for all but the most advanced cars ple, they already knew one critical feature of
with high proprietary technologies. The UK luxury cars. They knew that luxury cars had to
market no longer allows a manufacturer time to be quiet. For years, British motor car manufac-
introduce a car model and then scale up. Lean turers have tried to reduce sound levels in
manufacturers are able to bring “me too” luxury cars and found the task inherently diffi-
models to the market so rapidly that the first- cult. Sound level not only traded off against
mover manufacturers have no time to inculcate acceleration, high-revving engines tended to be
brand loyalty, let alone recover their develop- loud. It was also an integrative challenge,
ment costs. Lean competitors, work on shorter because sound comes from many other design
product development and life cycles, and they components, including the drive-shaft, tyres
manufacture wherever it is cheap. and door seals. A marketing director of one of
The growing number and increasing ubiquity the Japanese UK-based car manufacturers
of lean competitors means that copycat design explained:
versions of most new car models will be avail- Japanese researchers discovered that frequency
able within six months, not a year. So if market was as important to the customers as decibel level;
leaders cannot recover costs as they used to, that is, the nature of the sound was as important as
they have no choice but to manage costs from its loudness. This discovery pointed to a different
design challenge; and instead of minimizing
the design phase forward and to launch prod-
sound, designers tuned the car in a pleasing
ucts at prices that will attract broad segments of fashion.
customers and forestall imitation. How long
they can hold on to their market will often The relationship between volume and frequency
depend on how quickly they can offer greater points to the challenge facing any car manufac-
functionality without raising prices. For manu- turer and/or dealers engaged in motor car posi-
facturers to gain and hold market leadership, tioning. Customers’ preferences must be
they have to design the cost out of their cars expressed as innovative design options such as
when they set initial levels of quality and func- perceived quality and functionality targets. It is
tionality and they have to calibrate car perfor- at this point that manufacturers might use such
mance to an identified price niche. In short, interfunctional design techniques mapping the
senior managers need to approach new car relationship between customers’ demand fea-
development controlling for future costs. tures and specific engineering characteristics.

Market and product dimensions Market gap identification

Motor car manufacturers are aware that the Once a target cost has been calculated for a new
choices that drive the entire target-costing car, the design team has to divide it up among the
process are the customers. What prices will the various functions. How much can the team spend
Target pricing: a marketing management tool for pricing new cars Pricing Strategy & Practice
Ogenyi Ejye Omar Volume 5 · Number 2 · 1997 · 61–69

on one function as against all others? The team for the project or revising the test until the project
must first calculate the gap between the target passed. Target costing will not tolerate that.
cost and what it estimates it would cost to build The cardinal rule applies to the product as a
the car with the existing processes, supplies, whole. When targets are assigned to individual
productivity levels and materials. The difference subassembly teams some will beat their targets,
is a good approximation of the excess cost that some will meet them, and some will fall short.
must be wrung out of the new car model.
But success is not determined component by
It usually makes no sense to apply cost-
component; it is achieved, or not, by the final
reduction requirements uniformly across all the
product. When components turn out to be more
components and subsystems of the contemplat-
expensive than anticipated, that cost must be
ed model. Rather, the design team can consult
offset somewhere else in the design. This
customer value surveys, historical trends and
requirement demands a degree of cooperation
other data to guide it in determining how much
and team spirit that will necessitate change for
cost it can remove from each component or
many organizations.
subassembly. The team will allocate more costs
to critical features (allowing for increased
engine cost in a car that is intended to have a Managerial and marketing implications
peppier ride, for example). But the extra money
Any system that cuts across organizational
it allocates to improving one model feature must
boundaries and communicates so many vital
come from another function’s allocation,
economic and market objectives is bound to
because the target cost remains fixed.
have a profound impact on how the organization
Evidence from this study suggests that the
does business. One of the main benefits of target
UK-based Japanese car manufacturing firms
costing is that it forces car manufacturers to
using a target costing system, aim to keep prices
delineate their car development goals very
constant while adding as much functionality as
precisely and in a single vernacular.
possible to each new generation of vehicles. The
In some organizations, the observation was
system, therefore, attaches great importance to
that clarity of communication was sacrificed to a
determining what features and level of perfor-
general commitment to decentralization. At one
mance the customer will want most, and it uses
large manufacturer, the researchers observed
those preferences as the basis for assigning costs
that nearly every functional department was
to major functions and group components. All
using a unit of analysis that it had developed to
design team members, whatever their function
answer a question of importance to itself only
speciality, must regard the overall final cost
and that varied subtly from every other function-
target as an unalterable commitment; target
al department’s unit of analysis. Competitors’
commitments rated above design commitments.
specifications were collected by car model, exist-
The idea is that aggressive targets focus the
ing costs were computed by parts, customer’s
efforts of the design team on creative solutions
needs were defined in terms of brand attribute,
and press value engineering to its limits. Targets
manufacturing constraints were determined by
must fall under the protection of what is known
installation point, and the capabilities of the
as the cardinal rule (if you cannot meet the
dealers were measured by the volume of sales.
targets, you cannot launch the car). That being
All those measures were related, but none
the case, the process of car definition and target
addressed overall investment cost targets. There
generation continues, but not in the factory.
Some companies have a layered set of targets. was no overall context within which to work. As
The first pass is the simplest, and failure here a result, a car designer assigned to a particular
leads to a more sophisticated life-cycle analysis. subsystem (model shape) could not get a clear
But this approach must not become a game with answer to the question: “How much do cus-
ever lower hurdles, each test becoming less tomers value this shaping style?” Target costing
rigorous than the one before. As one manager requires that such problems be addressed
puts it: directly. It forces car manufacturers to be specif-
…in the past, if a specific project failed the test for ic about what customers want and what prices
funding, we just kept changing the assumptions they are prepared to pay. Finally, target costing
Target pricing: a marketing management tool for pricing new cars Pricing Strategy & Practice
Ogenyi Ejye Omar Volume 5 · Number 2 · 1997 · 61–69

creates opportunities to demonstrate a commit- Cooper, R. and Kaplan, R.S. (1985), “How cost accounting
ment to customers. Its discipline may be painful distorts product costs,” Management Accounting,
to the people who work on a project, but it sends Vol. 7, April, pp. 20-7.
an important message to the management and Crosby, P.B. (1979), Quality Is Free, New American Library,
the organization as a whole that customers come New York, NY.
first and that if the company does not create Curry, D.J. and Riesz, P.C. (1988), “Prices and price/quality
value for them, a competitor will. relationships: a longitudinal analysis,” Journal of
Marketing, Vol. 52, January, pp. 36-51.
Recommendations Davies, R., Downes, D. and Sweeting, R. (1991), UK Survey of
Cost Management Techniques and Practices, 1990/91,
For target pricing to succeed, targets must not Price Waterhouse, London, p. 11.
only be valid, employees must also see them as
Dicken, P. (1988), “The changing geography of Japanese
valid. They cannot be the outcome of a manufac- foreign direct investment in manufacturing industry:
turer’s political process. The market analysis that a global perspective,” Environment and Planning,
yields the target process, the financial analysis Vol. 9 No. 20, pp. 633-53.
that generates the target costs and the desegrega-
Ferrara, W.L. (1990), “More questions than answers: is the
tion procedures that allocate costs among com- management accounting system as hopeless as the
ponents and subassemblies must all be trusted. critics say?,” Management Accounting, October,
The target-costing process must, therefore, be pp. 48-52.
highly transparent throughout the organization.
Garrahan, P. and Stewart, P. (1991), “Work organisation in
Moreover, cost-reduction objectives must be
transition: the human resource management implica-
achievable most of the time. Setting the bar too tion of the ‘Nissan way’,” Human Resource Manage-
high can be as damaging as having no bar at all. ment Journal, Vol. 2 No. 2, pp. 46-52.
In fact, the Japanese set a series of what they call
Garvin, D.A. (1987), “Competing on the eight dimensions of
tip-toe objectives (objectives that may be
quality,” Harvard Business Review, Vol. 65, November-
reached by “standing on tiptoes”) – a stretch December, pp. 101-9.
that strains the organization but does not defeat
Gutman, J. and Alden, S.D. (1985), “Adolescents’ cognitive
it. Also, the requirements for motor car func-
structures of retail stores and fashion consumption: a
tionality must be articulated clearly so that
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