CH11. MODE B — Target Price Reverse Calculation

Presentation key message: Target-price reverse calculation translates a desired margin into price and reveals whether the current cost structure can support it.

1. Learning Objectives

Be able to reverse-calculate the selling price needed to achieve a Target Contribution Margin Rate.

2. Core Concepts

CH10 covered MODE A (settlement), which calculates “how much is left over at this price?” MODE B (target price reverse calculation) answers the opposite question: “If what’s left over isn’t enough, what price should we sell at?” Instead of guessing a new price and re-running MODE A repeatedly, MODE B calculates in one step the price that directly achieves the targeted Contribution Margin Rate.

The problem MODE B actually solves is this:

“Given the current cost and fee structure, what price must we sell at to secure the target Contribution Margin Rate?”

This question only becomes meaningful after MODE A has already been used to confirm the Contribution Margin Rate at the current price. MODE B does not replace MODE A — it is the next step built on top of it.

3. Why It Matters

Setting a price is not a simple matter of “add a margin to cost.” KM046 (Customer-Value-Based Pricing) emphasizes that customers pay not to reimburse cost, but because of the value they themselves recognize — and that you must first understand the price range and willingness to pay customers will accept, then work backward to review cost and product composition so the business case holds at that price. MODE B handles the arithmetic half of this “working backward” process. It calculates the price the business needs, but it does not calculate whether customers will actually accept that price. That judgment still belongs to a person.

As KM047 (Competition-Based Pricing and Positioning) points out, price is also a signal that leads customers to interpret quality and brand positioning. If the target price MODE B produces is far from the market price, that does not mean the calculation is wrong — it should be read as a signal that something among cost, target rate, or positioning needs to be reexamined.

4. Framework / Logic

The MODE B formula is not something the Master Note has confirmed — it is defined by the Pricing Harness’s Internal Specification (SPEC.md). What the Master Note (and the KM046/KM047 derived from it) supports is four concepts: “cost is a price constraint,” “customers pay for value,” “confirm willingness to pay, then work backward through cost,” and “price is connected to competition and positioning.” SPEC.md is what formulates these concepts into a concrete reverse-calculation formula, and METHOD.md explicitly states that “this formula is the Pricing Harness’s formulation of the problem MN06 raises — it is not a formula the Master Note text itself has confirmed.”

SPEC.md v0.2 defines the following terms:

C: fixed-amount direct cost + variable cost (the component in question)
b: sum of rate-based costs on a net sales (순매출) basis
a: sum of rate-based costs on a gross payment (총지불금액) basis
t: target Contribution Margin Rate (target_contribution_margin_rate)
v: VAT rate

The core formula is as follows.

N = C / [1 − t − b − a(1+v)]   (target net sales, VAT excluded)
G = N × (1 + v)                 (target gross payment, VAT included)

If the denominator D = 1 − t − b − a(1+v) is zero or less, this is not a “calculation failure” but an ERROR — a definitive diagnosis that no price, under the current cost and fee structure, can achieve the target Contribution Margin Rate.

Whether the VAT rate is actually needed cannot be answered as a single yes/no for “the whole calculation” — it must be judged metric by metric.

required_net_sales (N): if gross-payment-based cost (a) is 0, this can be calculated without a VAT rate. If a > 0, the VAT rate is required regardless of whether the display price includes or excludes VAT.
required_gross_payment (G): since G = N × (1+v), the VAT rate is always required, independent of a.
required_selling_price: if the display-price basis (price_includes_vat) is false, this follows N (and inherits N’s conditional rule); if true, it follows G (always needs the VAT rate). If the display-price basis itself is undetermined, this is UNKNOWN.

5. Application Process

First use MODE A to confirm the Contribution Margin Rate at the current price.
Decide the target Contribution Margin Rate (t) — always record its source (internal standard, investor requirement, industry benchmark, etc.). MODE B does not validate whether this number itself is reasonable.
Enter the cost/fee structure (C, b, a), the VAT rate (v), and the display-price basis (price_includes_vat).
Run MODE B to obtain the target net sales (N), the target gross payment (G), and the target actual selling price (required_selling_price).
If a discount policy exists, reverse-calculate the target list price using required_list_price = required_selling_price / (1 − discount_rate).
If the result is ERROR (denominator ≤ 0), consider cost reduction, adjusting the target rate, renegotiating channel/fee terms, or redesigning the product. Presenting these options is not MODE B’s role.
If the result differs greatly from the market price, interpret this not as a calculation error but as a structural signal, and reexamine it from a competition/positioning perspective (KM047).

6. Applying This in Pricing or the Harness

run_mode_b in core/engine/modes/mode_b.py computes the above logic at the component level. If a cost item has applies_to_component = "shared" and its allocation rule (allocation_rule) is one that isn’t yet supported, such as by_component_revenue or fixed_share, that cost is not treated as 0 — instead, every metric that depends on it is marked UNKNOWN entirely (warning code UNSUPPORTED_SHARED_COST_ALLOCATION). This applies the Harness’s “null is not zero” principle equally to target price reverse calculation — silently subtracting out a shared cost would produce a target price lower than it should be, understating what the business actually needs. If allocation_rule = "direct" is attached to a shared item, this is treated as an ERROR (INVALID_ALLOCATION_CONFIGURATION), because “not attributed to a component” and “already attributed” are semantically contradictory.

Also, target_contribution_margin_rate is currently a single global value that applies to the entire Client Input — the ability to set different target rates per component, as would be needed for a hybrid product like hardware + SaaS, is not yet implemented.

7. Practical Checkpoints

Did you always record the source of the target Contribution Margin Rate (internal standard/investor requirement/industry average, etc.)?
Did you treat an ERROR (denominator ≤ 0) as a definitive diagnosis — “this structure makes it impossible” — rather than “let’s recalculate”?
Did you distinguish UNKNOWN as “we cannot yet answer, because the data isn’t there” rather than “the value is low”?
Did you check both the display-price basis (price_includes_vat) and whether gross-payment-based cost (a) exists, to judge per metric whether the VAT rate is actually needed?
Rather than judging “expensive/cheap” from the target list price (required_list_price) alone, did you confirm that the actual billed amount after discount achieves the target?
When the target price differs greatly from the market price, did you leave the decision of what to adjust — cost, target rate, channel structure, or product redesign — to the consultant’s judgment (MODE B does not decide this for you)?

8. Key Takeaways

MODE B is a tool that reverse-calculates the selling price needed to achieve an input target Contribution Margin Rate. The formulas (N, G, the denominator D, etc.) are defined by the Pricing Harness’s Internal Specification, not by a formula the Master Note has confirmed. What the Master Note supports is the idea that cost is a constraint and that customer value must be confirmed before working backward through cost (KM046), and that price is a competitive/positioning signal (KM047) — the latter becomes the standard for interpretation when the target price diverges from the market price. When the denominator is zero or less, this is treated as ERROR; when data is missing, as UNKNOWN; and shared costs are never treated as 0.

9. Practical Questions

How large is the gap between our product’s current Contribution Margin Rate (the MODE A result) and the target Contribution Margin Rate?
What is the basis for that target Contribution Margin Rate — is it an investor requirement, an industry average, or an internal standard?
If the target price MODE B produces is an ERROR, which would you adjust first: cost, target rate, channel structure, or product composition?
If the target price is much higher than the market price, does the customer value (KM046) and positioning (KM047) needed to justify that gap actually exist?

Source Map

MN: MN06 (concept)
KM: KM046, KM047
Harness: core/engine/modes/mode_b.py (run_mode_b), docs/features/mode_b_target_price/{SPEC,METHOD,CASE}.md