We talk extensively about pricing in HDFRI Chapter 12 and one of the key concepts in that chapter is the recent adoption by many companies of a practice called “target costing.”  In target costing/pricing, a company estimates the value perceived by a customer given the nature and features of a proposed product and then tries to determine what price a customer would pay for that product.  The company then works “backwards” from that price to the “target cost” necessary for the company to sell the product for that price while still earning their desired rate of return.  This is the opposite of cost-based pricing where the company looks at their costs and then determines the price based largely on that.

The Journal of Accountancy this month explores a similar philosophy change in some CPA Firms (a service industry) where clients are no longer billed according to the number of billable hours worked by their accountants, but instead by the specific service being performed.  There is also a sidebar about pricing at Ben & Jerry’s that is a good example of the thought process that can come into play when determining prices.

Pricing on Purpose: How to Implement Value Pricing in Your Firm. By Ronald J. Baker.  The Journal of Accountancy, June 2009.

A Lesson in Value Pricing Ice Cream: From an Accountant. By Ronald J. Baker.  The Journal of Accountancy, June 2009.