A Revolutionary Product for the Value-Conscious
Cumberland Metals Industries developed a new type of cushion pad for pile drivers made of curled metal. The 11.5 inch “Cumber-Coil” was tested by two different companies on two different projects and was found to far exceed the performance of the existing market-dominant product, the asbestos pad. The Cumber-Coil weighed half what the asbestos pad did and boasted a 33% faster driving time, 60% reduction in heat generated, and 400% less time wasted changing pads.
The company that performed the first test was ecstatic with the results and has been pressuring CMI to sell them more Cumber-Coils. Since this is a brand new product unlike anything else available on the market, CMI must quickly settle on an amount to charge that will establish the reference price for their revolutionary product.
CMI has a number of options from which to choose when setting the Cumber-Coil’s initial price.
1) COST-PLUS: They could go with a cost-plus pricing method that would take into consideration all the costs involved with producing the product and then adding a fixed amount for gross margin. SIMPLE COST-PLUS|
| Material Cost/pad| | $ 15.64 |
| Labor Cost/pad| | $ 11.64 |
| Factory Overhead (360%)| | $ 41.90 |
| Total Manuf. Cost/pad| | $ 69.18 |
| Desired GM| | 45%|
| Cost-Plus Price Per Pad| | $ 125.78|
| Unit Cost / (1-GM)=Price| | |
By using the simple cost-plus pricing formula, we arrive at a price of $125.78/pad which translates into $754.68/set of six pads.
This price is not far outside the price range currently required to perform a job using the asbestos pads. To compare apples to apples, the cost of the required number of asbestos pads to drive 10,000 ft. (based on the results of the Colerick and Fazio tests) ranges from $700-1680. Alternatively, construction companies could spend $755 for a single set of the Cumber-Coil pads and do the same job in less time, more safely and with less potential for health hazards.
This price would likely be appealing to price-sensitive markets and would be easy to communicate and justify to potential customers.
2) GOING-RATE: They could try and determine what the going rate is for such a product in existing and/or similar markets.
In this case, it would be difficult to determine an accurate going-rate since CMI is unaware of any similar products in existence. This is a revolutionary product that is unlike anything previously available and will likely create its own market once it’s launched. The closest data available to a going rate would be the cost of the currently available asbestos pads, which are inferior to these new Cumber-Coils.
3) PERCEIVED VALUE: They could also take into consideration the perceived value of this new product and add premiums for the various benefits to demonstrate its superior quality to customers. PERCEIVED VALUE PRICING| |
Competitor's cost/set| $50.00| NOTES:|
Premium for Time Savings| $850.00| -> change time savings & 33% faster driving time| Premium for Safety (heat & health)| $200.00| -> never above 250 degrees & eliminates asbestos| Premium for Ease of Handling| $100.00| -> weigh 1/2 as much as asbestos pads| Premium for Cost Savings| $250.00| -> savings in rental, labor and overhead costs| Premium for Potential Additional Revenue| $500.00| -> ~5% of potential revenue from additional jobs| Total Cost Per Set| $1,950.00| |
Discount| -$292.50| 15%|
Your Cost Per Set| $1,657.50| |
When using the perceived value pricing formula, we arrive at a ceiling price of $1,950/set of six pads that can then be discounted to incentivize customers to purchase them.
While more costly per 10,000 ft. than the price established by pure...