Target Pricing: Demand-Side Versus Supply-Side Approaches

The practice of target pricing has been a key factor in the success of Japanese manufacturers. In the more commonly-known demand-side approach, the target price for the supplier equals the manufacturer’s market price less a percent margin for the manufacturer but no cost-improvement expenses are shared. In the supply-side approach, cost-improvement expenses are shared and the target price equals the supplier’s cost plus a percent margin for the supplier. We find that sharing cost-reduction expenses allows the manufacturer using the supply-side approach to attain competitive advantage in the form of increased market share and higher profit, particularly in industries where margins are thin and price sensitivities are high.