ACCT2019 Chap.8 Pricing and Customer Profitability
Pricing and Customer Profitability
Pricing decisions combine customer value, competitor behaviour and cost. Market-based target costing works backward from an acceptable price to an allowable cost after required profit. Cost-plus pricing works forward from a clearly defined cost base and markup. Customer profitability extends the analysis below gross margin by assigning order, delivery, support and channel activities.
Neither a proposed price nor an assigned margin settles the decision without market and avoidability checks. The required-profit base must be named because a percentage of selling price differs from the same percentage of cost or investment. A target-cost gap directs value engineering toward activities and features, not a uniform cut that might destroy customer value.
Customer analysis should distinguish product cost from order, delivery, sales and support work. Common corporate allocations without cause and effect may be useful for full reporting but can distort a keep-or-exit choice when the underlying resources will remain. A strong recommendation therefore combines the calculated boundary with customer research, competitor evidence and a specific process action.
It also explains which service capacity changes and which resources continue after the proposed change. Pricing analysis is therefore iterative: market evidence constrains the offer, activity evidence directs redesign and later customer behaviour tests whether the plan worked.
What this chapter covers
- 01
Customer, competitor and cost factors
- 02
Target pricing
- 03
Target-cost gap
- 04
Cost-plus pricing bases
- 05
Customer-cost hierarchy
- 06
Customer profitability action
Worked example · free
Working backward to target cost
- +1AskSia-created practice guidance. Target profit is 18% x $560 = $100.80.
- +1Target cost is $560 - $100.80 = $459.20.
- +2The cost gap is $478 - $459.20 = $18.80 per unit.
- +1Managers should redesign activities or features while protecting value customers require.
Key terms
- Target Price
- A market-based price shaped by customer value and competitive conditions.
- Target Cost
- The allowable cost after subtracting required profit from target price.
- Cost-plus Pricing
- A pricing approach that adds a markup to a specified cost base.
- Customer-cost Hierarchy
- Classification of costs by unit, batch, customer, channel or facility relationship.
- Value Engineering
- Systematic redesign to meet required function and quality at a lower cost.
Pricing and Customer Profitability FAQ
Why does the markup base matter?
A markup on manufacturing cost must recover different omitted costs than a markup on full cost. Without naming the base, the percentage is ambiguous and two apparently similar policies can produce different prices and returns.
Can cost-plus pricing ignore the market?
It can produce an internal offer price, but customers and competitors determine whether that price is feasible. Managers should test willingness to pay, capacity, strategic positioning and likely competitive response before treating the calculated price as achievable.
Should an unprofitable customer be dropped?
Not automatically. First test which service and capacity costs are avoidable, whether processes can improve, whether price or service terms can change, and whether the relationship produces credible strategic benefits or supports other revenue.
Exam move
Practise the target-cost route and cost-plus route side by side so their direction never blurs. For target costing, identify market price, required-profit base, allowable cost and gap. For cost-plus, identify the exact cost base, markup purpose and proposed price, then test the market. Build a small customer profitability statement that moves from revenue through product cost to order, delivery and support activity.
Highlight common corporate allocations and refuse to use them for exit decisions until avoidability is shown. Finish each analysis with an action ladder: correct a process, reduce non-value-added activity, change service level, renegotiate price and only then consider ending the relationship. This preserves the difference between measurement and management.
Recalculate the same desired return once as a percentage of price and once as a percentage of cost to see why the base must be named. For target costing, divide the gap across activities only after asking which features create customer value. For cost-plus, test whether the resulting offer survives competitor prices and customer willingness to pay.
In customer analysis, separate unit, batch, customer-sustaining and channel work, then identify capacity that would actually disappear after a change. Write one recommendation that improves a process and another that changes commercial terms. Compare them before suggesting exit. The final paragraph should name the market evidence still needed, because an internally correct price cannot establish demand on its own.
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