Market-oriented cost management: The potential of target costing

In today’s highly competitive economy, cost management plays a central role in long-term business success. Companies are faced with the challenge of offering high-quality products at appealing prices while at the same time operating profitably. It is often no longer enough to simply keep an eye on the actual costs incurred. It is necessary to align the cost structure with market requirements in advance and to manage it in a targeted manner.

In this context, target costing has established itself as a particularly effective method. It enables companies to strategically align the development of products and services with customer requirements and given market prices. The central aim is to influence costs as early as possible in the product development process and thereby ensure long-term competitiveness.

This blog article provides a comprehensive overview of the concept of target costing. It explains the basic principles, the process and the advantages of this method and shows how companies can successfully use target costing in their daily business.

Target costing is a modern method of cost management that originated in Japanese industry and has steadily gained in importance since the 1960s. The aim is to consistently align the costs of a product with market conditions and customer expectations. In contrast to traditional methods, in which costs are calculated after product development and reduced if necessary, target costing starts in the early phase of product development. The target market price level and the desired profit margins form the central starting point for determining the permissible costs.

A key feature of target costing is its customer-oriented approach: the wishes and requirements of customers are at the centre of all considerations. Right from the start, companies ask themselves what price the market will accept for a particular product and how this product can position itself against competitors. This is used to determine how high the maximum costs for development, production and sales can be in order to achieve satisfactory profitability despite price pressure. In doing so, companies must find innovative ways to develop their processes and product designs in such a way that costs remain within the set target. Target costing therefore differs fundamentally from other cost management methods such as traditional cost-plus calculation.

The target costing process begins with the determination of the planned sales price for a new product. This price is based on the target customer's expectations and comparable offers on the market. Companies carry out intensive market analyses and take into account both the customer's willingness to pay and the competitive landscape. The target sales price then forms the foundation for further calculations.

In the next step, companies derive the so-called target costs from this sales price. To do this, they subtract the desired profit margin from the planned sales price. The difference calculated in this way gives the maximum permissible costs that must not be exceeded throughout the product's entire life cycle. At this stage, it is already clear how important it is to ensure that cost planning and the company's strategy are closely interlinked.

In the further course of the process, the current costs for development, production and sales are determined. It often turns out that the existing structures and processes lead to higher costs than the target would allow. In this case, companies analyse the causes of the deviations in detail and define specific measures to reduce costs. The search for potential savings can involve both technical innovations and organisational changes. The aim is always to meet the targets without compromising quality or customer benefits.

However, the target costing process does not end with the initial determination and adjustment of costs. Rather, it is an iterative and continuous approach that is applied throughout the entire product development process. Companies regularly check whether their measures are working and whether the target costs are being met. In this way, target costing ensures that profitability is actively managed during the development phase and not only later during ongoing operations.

In target costing, the involvement of different areas of the company is of central importance. Each department makes an important contribution to efficiently realising the target costs and successfully positioning the product on the market. The development and design department in particular is at the centre of the process, as it plays a key role in determining the essential product design and therefore offers the greatest leverage for influencing costs. Already in the early phase of product development, possible material selection, production technologies and designs are evaluated with regard to cost efficiency and customer requirements.

Production also plays an important role, as it must be able to produce the required quantities while meeting the target costs. This requires precise coordination between development and production, for example when it comes to the selection of manufacturing processes or the use of new technologies. Close collaboration ensures that technical innovations do not lead to unexpected cost increases and that the entire value chain is optimised.

Marketing is closely involved in the process as it has first-hand knowledge of customer requirements and wishes and provides important information on market trends and price levels. Only if the needs of the target group are precisely identified realistic target costs can be defined and the product can be designed in line with the market. In addition, the sales department is required to provide estimates of price elasticity and acceptance of the product in the market.

Finally, controlling manages all business aspects of target costing. It ensures that the financial targets are met and monitors the implementation of the planned measures. Controlling ensures transparency throughout the entire process and provides regular feedback on the status of target cost achievement. Close co-operation between all departments involved creates a cross-departmental understanding of the importance of cost management, which ultimately ensures the company's success.

Target costing offers companies a wide range of benefits that go far beyond pure cost management. The method aligns all activities specifically to the requirements and wishes of customers. This results in a clear focus on market-driven products that are convincing in terms of both quality and price.

An important advantage lies in the promotion of innovation and cross-departmental collaboration. As all departments in the company are involved in the development process right from the start, there are numerous starting points for creative solutions.

Target costing also ensures greater cost transparency throughout the entire product life cycle. Companies recognise at an early stage in which areas there is a need for action and can take targeted measures to optimise processes. This significantly reduces the risk of products being developed outside the market or offered at an uncompetitive price.

Despite the numerous advantages, target costing also brings with it some challenges and limitations. Determining realistic target costs regularly presents companies with difficulties, as it requires in-depth market analyses and precise knowledge of customer requirements. Especially in dynamic markets, it can be a challenging task to find the right target price and derive the permissible costs from it. Changes in customer behaviour or competitor behaviour can mean that set target costs have to be adjusted quickly.

A key factor in the success of target costing is the close cooperation between different departments. This cross-departmental coordination requires openness, commitment and mutual understanding. In practice, companies often come up against organisational hurdles. Different priorities, communication difficulties or a lack of cost awareness can slow down or even hinder the process. Clear leadership and a distinct project culture are required in order to optimally utilise the synergies between departments.

There is also a risk that focussing too much on cost reductions can have a negative impact on quality or the ability to innovate. If target costs are set too tightly, even useful and customer-orientated product features come under pressure. Companies must therefore carefully weigh up how to maintain a balance between cost efficiency and added value. Above all, creative solutions and technical innovations must not be hindered by strict cost targets.

Target costing is therefore not a rigid system but requires flexible and responsible action to achieve long-term corporate goals without losing sight of the competitiveness and attractiveness of your own products.

Target costing has established itself as an effective cost management tool in various industries. This is particularly evident in the automotive industry, where companies already focus on all cost aspects of a new vehicle in the early development phases. Car manufacturers use target costing to align their vehicles precisely with customer expectations and the respective market conditions. Not only material and production costs, but also aspects such as supplier management and process optimisation are consistently included. The aim is to offer competitive models at a price that fulfils both margin targets and market requirements.

Companies in the mechanical and plant engineering sector also benefit from target costing. The products in this area are often very complex and customised to individual customer requirements. By using target costing, it is possible to make costs transparent during the planning and development stages and control them in a targeted manner. In this way, innovative and customised solutions can be developed without losing sight of profitability. At the same time, the method ensures that the calculations remain realistic and subsequent surprises in the cost structure are avoided as far as possible.

In addition to these industrial sectors, target costing is also increasingly being used in other sectors, such as the electronics industry, consumer goods and medical technology. Target costing can provide decisive impetus for systematic and sustainable corporate management wherever companies are caught between the conflicting priorities of high customer orientation, increasing competitive pressure and the need to control costs. The versatility of the method shows that it forms a valuable basis for corporate success, regardless of industry or product type.

The successful implementation of target costing requires careful preparation and a clear understanding of the company's own objectives. It is important to involve the departments concerned at an early stage and to create a common understanding of the significance and objectives of target costing.

Another success factor is to establish transparent processes and clear responsibilities. Target cost management can only be implemented efficiently if everyone involved knows what tasks they have to fulfil and how the individual steps interlink. The best way to integrate target costing into existing processes is to make gradual changes and prepare the relevant employees for the new requirements through targeted training and workshops.

Experience also shows that the use of advanced digital tools and analysis methods can make implementation much easier. They offer the possibility of analysing market and cost data in real time, simulating scenarios and accelerating decision-making processes. Digital support helps to identify potential for cost optimisation more quickly and to maintain an overview both in the development phase and throughout the product life cycle.

The more consistently the company follows the principles of target costing, the more effectively the benefits can be utilised in practice. The decisive factor is not to view the methodical approach as a one-off project, but to anchor it as an ongoing part of corporate management. This way, companies create the foundation for permanent cost control, strengthen their competitiveness and ensure economic success even in challenging markets.

The implementation of target costing is made considerably easier through the use of professional costing software. In modern companies that work with a large number of product variants, complex parts lists and international locations, conventional spreadsheets quickly reach their limits. Specialised software solutions offer decisive added value here by bundling and processing all relevant data centrally and presenting it transparently. They make it possible to precisely define target costs, dynamically map current cost structures and carry out simulations for different scenarios.

By integrating costing software into existing ERP or PLM systems, development processes, material usage and production variants can be monitored and controlled in real time. Users always have an up-to-date overview of the extent to which the target costs are being met and can take timely countermeasures in the event of discrepancies. Furthermore, professional solutions offer extensive analysis functions that make weak points in product design or the procurement process visible at an early stage.

Another advantage is the improved collaboration between different departments. Development, purchasing, production and controlling can jointly access a consolidated database and optimally coordinate their measures. Changes made in product design, for example, can be immediately assessed in terms of their impact on target costs. This not only ensures greater transparency, but also speeds up decision-making processes and increases the quality of collaboration.

Investing in professional costing software is therefore particularly worthwhile for companies that value efficient and sustainable cost management. It creates the prerequisites for consistently integrating target costing into everyday operations, fully utilising the potential for cost savings and ensuring long-term competitiveness.

Target costing has proven to be an effective tool for aligning products and services with market and customer requirements while at the same time securing profit goals. The method ensures early control of all cost-driving factors and promotes structured and interdisciplinary cooperation. Companies that consistently pursue this approach manage to minimise risks in product development, increase the transparency of their costs and achieve lasting success on the market.