Flevy Management Insights Q&A

What are the most effective methodologies for costing new products in a competitive market?

     David Tang    |    Pricing Strategy


This article provides a detailed response to: What are the most effective methodologies for costing new products in a competitive market? For a comprehensive understanding of Pricing Strategy, we also include relevant case studies for further reading and links to Pricing Strategy best practice resources.

TLDR Effective costing of new products in competitive markets involves Activity-Based Costing, Target Costing, and Value Engineering, focusing on cost efficiency, quality, and market competitiveness for improved profitability.

Reading time: 5 minutes

Before we begin, let's review some important management concepts, as they relate to this question.

What does Activity-Based Costing mean?
What does Target Costing mean?
What does Value Engineering mean?


Costing new products in a competitive market requires a multifaceted approach, blending traditional costing methodologies with innovative strategies to ensure price competitiveness, value delivery, and profitability. Organizations must navigate through a myriad of factors including production costs, market demand, competitor pricing, and customer value perception. This complex process demands a strategic, data-driven approach to establish a pricing model that not only covers costs but also aligns with the overall market strategy.

Activity-Based Costing (ABC)

One effective methodology for costing new products is Activity-Based Costing (ABC). ABC provides a more accurate method of costing products by assigning costs to activities based on their use of resources and then assigning costs to product items based on the product's demand for each activity. This method helps organizations understand the true cost of producing a product by identifying and evaluating all activities involved in its production and delivery. By focusing on cost drivers, ABC allows organizations to pinpoint areas where efficiencies can be gained and where costs can be reduced without impacting product quality or customer satisfaction.

For instance, a report by Deloitte highlights how ABC can enhance an organization's ability to compete in a crowded market by providing a clearer picture of cost structures and profit margins. By leveraging ABC, organizations can make informed strategic decisions about product design, pricing strategies, and customer targeting. This methodology is particularly useful in industries where products are complex and production processes involve multiple steps and resources.

Real-world examples of ABC's effectiveness include manufacturing firms that have used this methodology to redesign their products. By understanding the activities that contribute most significantly to costs, these firms have been able to innovate their production processes, reduce waste, and introduce more cost-effective materials without compromising on quality, thereby gaining a competitive edge in their respective markets.

Are you familiar with Flevy? We are you shortcut to immediate value.
Flevy provides business best practices—the same as those produced by top-tier consulting firms and used by Fortune 100 companies. Our best practice business frameworks, financial models, and templates are of the same caliber as those produced by top-tier management consulting firms, like McKinsey, BCG, Bain, Deloitte, and Accenture. Most were developed by seasoned executives and consultants with 20+ years of experience.

Trusted by over 10,000+ Client Organizations
Since 2012, we have provided best practices to over 10,000 businesses and organizations of all sizes, from startups and small businesses to the Fortune 100, in over 130 countries.
AT&T GE Cisco Intel IBM Coke Dell Toyota HP Nike Samsung Microsoft Astrazeneca JP Morgan KPMG Walgreens Walmart 3M Kaiser Oracle SAP Google E&Y Volvo Bosch Merck Fedex Shell Amgen Eli Lilly Roche AIG Abbott Amazon PwC T-Mobile Broadcom Bayer Pearson Titleist ConEd Pfizer NTT Data Schwab

Target Costing

Another powerful methodology is Target Costing, a pricing strategy that works backward from a competitive market price to determine allowable costs for manufacturing a new product. This approach is centered around creating products that meet both cost and customer value criteria. Target Costing starts with identifying the customer's next best alternative and setting a target price that ensures competitiveness in the market. From this target price, the desired profit margin is subtracted to arrive at a target cost, which then guides the design, development, and production processes.

According to a study by McKinsey & Company, Target Costing is particularly effective in highly competitive markets where price is a critical factor for success. It forces organizations to be innovative and cost-conscious from the outset, integrating cost management into the product development cycle. This proactive approach to cost management encourages cross-functional collaboration between design, engineering, and manufacturing teams to achieve cost objectives while maintaining product quality and customer value.

An example of Target Costing in action is seen in the automotive industry, where companies like Toyota have successfully implemented this methodology to launch new models that meet strict cost targets without sacrificing quality or performance. By focusing on cost from the design phase, Toyota has been able to introduce innovative features and technologies in its vehicles while maintaining competitive pricing.

Value Engineering

Value Engineering (VE) is a systematic method to improve the "value" of goods or products and services by using an examination of function. Value, as defined, is the ratio of function to cost. VE helps organizations analyze their products and services with the aim of reducing costs while maintaining or improving function and quality. This methodology encourages teams to explore alternative solutions that achieve the same objectives at a lower cost.

Accenture's research indicates that Value Engineering can significantly impact an organization's ability to offer competitively priced products without eroding profit margins. By focusing on the value that each component or process adds to the final product, organizations can make informed decisions about where costs can be reduced or eliminated. This approach not only aids in reducing the cost of new products but also in enhancing their value proposition to customers.

Companies in the technology sector, for example, have leveraged VE to streamline their products. By identifying and removing non-essential features that do not add significant value to the customer, these organizations have been able to reduce production costs and offer their products at more competitive prices, thereby attracting a larger market share.

Each of these methodologies—Activity-Based Costing, Target Costing, and Value Engineering—offers a strategic approach to costing new products in a competitive market. By applying these methods, organizations can achieve a balance between cost efficiency, quality, and market competitiveness, ultimately leading to improved profitability and market position.

Best Practices in Pricing Strategy

Here are best practices relevant to Pricing Strategy from the Flevy Marketplace. View all our Pricing Strategy materials here.

Did you know?
The average daily rate of a McKinsey consultant is $6,625 (not including expenses). The average price of a Flevy document is $65.

Explore all of our best practices in: Pricing Strategy

Pricing Strategy Case Studies

For a practical understanding of Pricing Strategy, take a look at these case studies.

Dynamic Pricing Strategy for Regional Telecom Operator

Scenario: The organization, a mid-sized telecom operator in the Asia-Pacific region, is grappling with heightened competition and customer churn due to inconsistent and non-competitive pricing structures.

Read Full Case Study

Dynamic Pricing Strategy for Luxury Cosmetics Brand in Competitive Market

Scenario: The organization, a luxury cosmetics brand, is grappling with optimizing its Pricing Strategy in a highly competitive and price-sensitive market.

Read Full Case Study

Pricing Strategy Reform for a Rapidly Growing Technology Firm

Scenario: A technology company developing cloud-based solutions has experienced a surge in customer base and revenue over the last year.

Read Full Case Study

Dynamic Pricing Strategy for Boutique Coffee Chain in Urban Markets

Scenario: A prominent boutique coffee chain, renowned for its unique blends and personalized customer experience, faces a strategic challenge in optimizing its pricing strategy amid fluctuating market conditions.

Read Full Case Study

Dynamic Pricing Strategy Framework for Telecom Service Provider in Competitive Landscape

Scenario: The organization in question operates within the highly saturated telecom industry, facing intense price wars and commoditization of services.

Read Full Case Study

Dynamic Pricing Strategy for Boutique Hotel Chain in the Luxury Segment

Scenario: A boutique hotel chain operating within the luxury segment is facing challenges with its current pricing strategy, leading to uneven occupancy rates and revenue fluctuations.

Read Full Case Study


Explore all Flevy Management Case Studies

Related Questions

Here are our additional questions you may be interested in.

What impact are global economic fluctuations having on pricing strategies across different industries?
Global economic fluctuations significantly influence pricing strategies in various industries, necessitating businesses to adapt through dynamic pricing, understanding market and consumer behavior changes, and leveraging advanced analytics for competitive advantage and profitability. [Read full explanation]
How is the increasing focus on sustainability affecting global pricing strategies in various industries?
The growing emphasis on sustainability is reshaping global pricing strategies, driven by consumer preferences, regulatory pressures, and sustainability costs, leading to higher-priced sustainable products and innovative pricing models across industries. [Read full explanation]
How should workshop providers structure pricing to reflect the value delivered while remaining competitive?
Workshop providers should employ a strategic approach to pricing by understanding market dynamics, adopting a Value-Based Pricing Strategy, and implementing Dynamic and Flexible Pricing Models to reflect value and maintain competitiveness. [Read full explanation]
How can businesses leverage subscription-based pricing models to enhance customer loyalty and recurring revenue?
Subscription-based pricing models boost customer loyalty and recurring revenue through personalized offerings, strategic engagement, flexible plans, and value-added services, supported by examples like Netflix and Spotify. [Read full explanation]
How are businesses adapting their pricing strategies to cater to the gig economy and freelance market?
Organizations are adapting to the gig economy by implementing Dynamic Pricing, Subscription and Membership Models, and Value-Based Pricing, focusing on flexibility, innovation, and customer-centric approaches to ensure market competitiveness and sustainability. [Read full explanation]
What pricing method eliminates non-value-added costs?
Lean Pricing eliminates non-value-added costs by streamlining operations and ensuring every cost contributes directly to customer value. [Read full explanation]

 
David Tang, New York

Strategy & Operations, Digital Transformation, Management Consulting

This Q&A article was reviewed by David Tang. David is the CEO and Founder of Flevy. Prior to Flevy, David worked as a management consultant for 8 years, where he served clients in North America, EMEA, and APAC. He graduated from Cornell with a BS in Electrical Engineering and MEng in Management.

It is licensed under CC BY 4.0. You're free to share and adapt with attribution. To cite this article, please use:

Source: "What are the most effective methodologies for costing new products in a competitive market?," Flevy Management Insights, David Tang, 2025




Flevy is the world's largest knowledge base of best practices.


Leverage the Experience of Experts.

Find documents of the same caliber as those used by top-tier consulting firms, like McKinsey, BCG, Bain, Deloitte, Accenture.

Download Immediately and Use.

Our PowerPoint presentations, Excel workbooks, and Word documents are completely customizable, including rebrandable.

Save Time, Effort, and Money.

Save yourself and your employees countless hours. Use that time to work on more value-added and fulfilling activities.




Read Customer Testimonials

 
"Flevy.com has proven to be an invaluable resource library to our Independent Management Consultancy, supporting and enabling us to better serve our enterprise clients.

The value derived from our [FlevyPro] subscription in terms of the business it has helped to gain far exceeds the investment made, making a subscription a no-brainer for any growing consultancy – or in-house strategy team."

– Dean Carlton, Chief Transformation Officer, Global Village Transformations Pty Ltd.
 
"As a niche strategic consulting firm, Flevy and FlevyPro frameworks and documents are an on-going reference to help us structure our findings and recommendations to our clients as well as improve their clarity, strength, and visual power. For us, it is an invaluable resource to increase our impact and value."

– David Coloma, Consulting Area Manager at Cynertia Consulting
 
"The wide selection of frameworks is very useful to me as an independent consultant. In fact, it rivals what I had at my disposal at Big 4 Consulting firms in terms of efficacy and organization."

– Julia T., Consulting Firm Owner (Former Manager at Deloitte and Capgemini)
 
"As a young consulting firm, requests for input from clients vary and it's sometimes impossible to provide expert solutions across a broad spectrum of requirements. That was before I discovered Flevy.com.

Through subscription to this invaluable site of a plethora of topics that are key and crucial to consulting, I "

– Nishi Singh, Strategist and MD at NSP Consultants
 
"One of the great discoveries that I have made for my business is the Flevy library of training materials.

As a Lean Transformation Expert, I am always making presentations to clients on a variety of topics: Training, Transformation, Total Productive Maintenance, Culture, Coaching, Tools, Leadership Behavior, etc. Flevy "

– Ed Kemmerling, Senior Lean Transformation Expert at PMG
 
"[Flevy] produces some great work that has been/continues to be of immense help not only to myself, but as I seek to provide professional services to my clients, it gives me a large "tool box" of resources that are critical to provide them with the quality of service and outcomes they are expecting."

– Royston Knowles, Executive with 50+ Years of Board Level Experience
 
"I have used Flevy services for a number of years and have never, ever been disappointed. As a matter of fact, David and his team continue, time after time, to impress me with their willingness to assist and in the real sense of the word. I have concluded in fact "

– Roberto Pelliccia, Senior Executive in International Hospitality
 
"As an Independent Management Consultant, I find Flevy to add great value as a source of best practices, templates and information on new trends. Flevy has matured and the quality and quantity of the library is excellent. Lastly the price charged is reasonable, creating a win-win value for "

– Jim Schoen, Principal at FRC Group



Download our FREE Strategy & Transformation Framework Templates

Download our free compilation of 50+ Strategy & Transformation slides and templates. Frameworks include McKinsey 7-S Strategy Model, Balanced Scorecard, Disruptive Innovation, BCG Experience Curve, and many more.