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Is Target Costing the Best Way to Determine Pricing


Image of two young businessmen using touchpad at meeting

Pricing is one of the first things that has to be established when starting a new business. At what price will the entrepreneurs sell their products or services? There is a tendency to look at the competition and slightly undercut them in order to quickly win a few customers. Another option is something known as target costing.

Among the many pricing structures, some say that target costing is the best choice. This is rooted in a pretty basic principle: if you cannot make the numbers work on paper, you either rethink the venture or don’t start it at all.

Fstoppers contributor Scott Choucino published a post and companion video in early April 2021 explaining how to set prices. One of his followers explained in a comment that Choucino was employing a form of target costing. Great. It seems to work for him. But is target costing always the best way to determine pricing?

                Target Costing Basics

Target costing is a process that begins with researching the market. Entrepreneurs research in an attempt to figure out what people are already willing to pay for a given product or service. Research also seeks to understand what consumers will pay for additional features. Along the way, the goal is to determine features that have true value to consumers.

With a base price in mind, the entrepreneur then determines their margin. In other words, how much of the total price does the entrepreneur want to constitute profit? That is margin. If a product sells for $100 but costs $80 to make, the margin is 20%.

Finally, the entrepreneur takes the total price and subtracts the margin to determine how much money they have to cover their costs – including overhead. If they cannot produce the product or offer the service within the constraints of that amount, then they either scrap the project or go back and start over with new research.

                Target Costing in Photography

You can learn how Choucino applies target costing to his photography business by reading his blog and watching his video. Still, he is just one professional photographer. It is not necessarily a given that other photographers could make it work.

There are all sorts of photographers offering a variety of services. For example, Vargo Photography primarily offers commercial photography in Salt Lake City. The studio does commercial head shots, product shots, brand photography, etc.

There are other photographers who specialize in what is the modern equivalent of photojournalism. They take photos they sell to websites, magazine publishers, newspapers etc. Similarly, there are legions of photographers who sell their work to stock photo catalogs.

It might be easier for a commercial photographer to employ the target costing method than someone whose work is more along the lines of photojournalism. In the photojournalism world, you are not producing a set number of photographs for a specific price. Instead, you’re agreeing to produce whatever photographs are necessary to tell a story.

                Target Costing Other Industries

You run into the same dilemma in other industries. Target costing may be an exceptionally good pricing method in manufacturing, for example. Why? Because you are working with singular products with known manufacturing costs. But what if you’re a business consultant? What you do is not so easily quantifiable.

There is no denying that target costing is an excellent means of determining pricing for some industries. It is not the be-all and end-all, however. Some businesses do not work well with this sort of pricing model. In the end, the best pricing model is the one that generates the most profit without alienating customers.