Final Answer:
Target Pricing determines the sales price customers will pay and sets a target cost to ensure the desired profit, while Cost-Based Pricing sets the price based on production cost and desired profit margin.
Step-by-step explanation:
Target Pricing:
Target Pricing is a strategic pricing approach that focuses on determining the price customers are willing to pay for a product or service. It involves setting a target cost, which is the maximum cost allowed to develop, produce, and deliver the product while still achieving the desired profit margin, known as the Full Product Cost. The process involves working backward from the target price, adjusting the cost to ensure the desired profit is met.
For instance, if the target price is $100, and the desired profit is $20, the target cost would be $80. This means the company needs to control its costs to ensure the product can be produced and delivered for $80 while achieving the desired profit.
Cost-Based Pricing:
Cost-Based Pricing, on the other hand, sets the sales price based on the product cost and the desired profit margin. It involves calculating the cost of producing a product and then adding a desired profit margin to determine the selling price. This method is more straightforward but doesn't consider customer willingness to pay or market conditions.
For example, if the cost of producing a product is $60, and the desired profit is $15, the selling price would be $75.