To do this, we first find out how much the planned product will likely fetch on the market and take that value as the sales price. Then we need to decide how big a profit margin is required. The total costs are what is left over when we subtract the profit from the sales (market) price
After that, we can go on to ask questions like. "What kind of materials can we use and still keep the costs within the equation's total cost figure?" We can also work out our choices of production methods and labor resources in this way. The costs + profit = sales price approach is based on predetermined costs, and is therefore a production-oriented approach. In Japan, the latest jargon describes this as the "product-out" approach.
On the other hand, the sales price-profit-costs approach takes the opposite direction by starting with the market as a base. It is therefore a market-oriented (or"market-in") approach.
Which approach do you think is better suited to today's highly competitive markets? In a mature market, the product- oriented approach will only work for an extraordinarily popular and distinctive product. Otherwise, the product would be outsold by similar products whose prices follow downward moving market trends. In addition, we should not regard profit as a side product. Instead of being pleasantly surprised by the appearance of a profit, we should take more positive steps to ensure one.
The sales price is almost always being pushed downward by market needs. That leaves only one viable method for squeezing a profit out of the equation: lowering costs.
In recent years, the companies that have been the biggest profit-earners are the ones that have been best able to keep costs down. The losers have been those that have not been able to cut costs. You cannot blame many of the losers for not trying. Many have tried Total Quality Control (TQC), cost reduction projects, suggestion systems, small group activities, and various types of employee committees, but none of these have been thorough enough to bring real success.