“Help! Save me from
‘Target costing’—everything
around me is breaking!”
Mary Drotar, partner, Strategy2Market, inc. ( mdrotar@strategy2market.com)
Mary Drotar
The author explains that Target costing is arguably one of the single greatest contributors to the poor quality of products in today’s
marketplace. Product innovators like to tell us that beautifully designed products needn’t cost more to manufacture. I argue that, in
many cases, this is true. However, it is also true that a product doesn’t have much to offer in the beauty department if it routinely fails
to survive the rigors of use for which it was supposedly designed—whether that’s within the first few months or after years of service.
So what is Target costing?
Target Costing is defined as a cost-management tool for reducing the overall cost of a product over its entire life cycle with the help of production, engineering, research,
and design. A target cost is the maximum outlay that can be
incurred on a product while still meeting the required profit
margin at a particular selling price.1
It’s all about reducing COST. This all too often involves the
cost savings, you’d surely want to avoid the kind of mistake the
following company made.
Back in the mid-1990s, a manufacturer of small kitchen
electrical appliances was considering its options for reducing
costs. They contracted with a supplier in the Far East to pro-
duce circuit boards for an electric grill designed for the U. S.
household market.
The initial run of circuit boards met all the quality criteria
and operated according to specification. However, without
notifying its customer, the circuit board supplier, as a means
of reducing its own production cost, began using different, less
costly materials. The lesser-quality circuit boards began to fail
prematurely. Consumers started returning the defective electric
grill to the stores, and the stores in turn returned them to the
manufacturer and ceased carrying any of the manufacturer’s
products. Without the possibility of selling any additional new
products, the manufacturer couldn’t absorb the cost of all the
returns and soon went out of business.
Bearing this in mind, and assuming that you care about the
reputation of your company, ask yourself: “What would Target
Costing mean for my end-user customers?”
“A target cost is the maximum outlay that can be incurred on
a product while still meeting
the required profit margin at a
particular selling price.”
Speaking of feeling ripped off!
A few years ago at a Target Costing presentation hosted by the
American Society of Mechanical Engineers (ASME), the speaker
offered some basic principles of Target Costing—cutting materials
cost, decreasing the product life, and so forth. An audience member
neatly summed up the ludicrousness of this whole approach with
the remark: “You mean Target Costing is the reason the windows
in my $1 million home were replaced within three years!”
Yes, it happens to all of us. The list of failed products is exten-
sive, especially in the area of consumer electronics, examples of
which we can probably all identify with. According to an analysis
conducted by Accenture, the customer return rate for consumer
electronics in the United States averaged 11 to 12 percent. It cost
the U.S. electronics industry $13.8 billion to rebox, restock, and
resell the returned items. 2 Based on my personal experience, these
are some of the products that I’ve purchased over the last three
years that failed within 3 to 12 months:
Vacuum cleaners (two times)•
Stereo systems and components (CD player, DVD player, •
headphones)
Desktop computer•
Printers (two times)•
Phone systems (three times)•
Beautifully designed Target brand lamps (two times) and trash •
cans (two times)
Fax machine •
Now ask yourself where the sense is in paying up to $500 for a
premium vacuum cleaner, when you can purchase a 15-year-old
Oreck from a garage sale for only $20 that still works better than
the three shiny brand-new bagless wonders that I purchased over
the last three years.
Like you, I’m willing to pay extra for a product that’s designed
and manufactured for a longer life, but clearly not 5 or 10 times
the price. For instance, how much do you need to pay for a one-
piece iPod docking station to help you get more out of your music
collection at home?
Have you noticed all the awful reviews for music player docking
stations sold through the big online retailers? Yes, to get something
well made, reliable, and capable of doing what you ask of it, you
