Brief Description of Company and the Situation
Curled Metal Inc. (CMI) specializes in selling metal-based products to various markets. With over $55 million in annual sales (FY 2007, Exhibit A), they’ve managed to capture 80% of the automobile industry’s market share by developing and selling a highly specialized product, Slip Seal, designed just for auto manufacturers. They’ve seen a recent slip in sales (a loss of nearly 10% from 2006 to 2007, Exhibit 2), and the pressure is on them to diversify their product line and decrease dependence on the auto industry. They’ve recently developed a new product that aims to revolutionize the pile-driving industry. The introduction of the CMI Cushion Pad has the ability to change the entire industry for its consumers; some of its more prominent features include the capabilities to significantly lower labor and equipment costs, decrease the total amount of pads being used (effectively eliminating waste), and reduce environmental safety concerns amongst the workforce due to the non-toxicity of the pads’ material. CMI has recently conducted two field testings of its Cushion Pads, with incredible results: the new product performed better than expected at both test sites (Kendrick Foundation Company and Corey Construction). Kendrick was so pleased with the Cushion Pads that they’ve asked CMI to quote prices. CMI is now faced with identifying the best price for this product. CMI Cushion Pads Pricing Considerations:
In pricing their Cushion Pads, CMI faces a number of challenges that must be analyzed in order to determine the best possible price. The most pressing issue is the uniqueness of this product and CMI’s newness to this market; while there is no doubt that this product holds a high value for its customers, a large portion of that value is due to a reduction in labor and equipment costs. Customers may not be willing to pay more for pads without industry backing, guaranteeing this value of the pads. There is also a very low reference point for other purchasers of this product as it relates to competitors’ products (see Figure 1). The second issue is CMI’s desire to increase their sales (with an ideal goal of doubling the $55 million in sales currently with this product alone). This lofty sales goal disallows several pricing strategies to be used (laid out below in the “Pricing Analysis: Alternative Solutions” portion of this paper). A third point for consideration in the pricing of the Cushion Pads is the corporate management expectation of a 50% contribution margin. Finally, the limited production capabilities of 250 pads/month (with additional units adding $225,000/250 pads in monthly variable costs) create a burden in identifying the best price. CMI Cushion Pads Pricing Analysis (Alternative Solutions)
There are a number of different pricing strategies that CMI can take to price the new Cushion Pads. CMI can start with a Cost-Plus Approach, given their newness to this market. The total unit price per pad would be _____, with a break-even price of ______. In both scenarios, it’s actually wiser to absorb the $150,000 machinery costs (see Figure 2). The second option could be to price the Cushion Pads using a competitor-based strategy. (Figures 2 and 3). The total per pad would be _____. While both of these options satisfy the desired contribution margin of 50%,
neither of these strategies picks up all of the money that is created by the product’s value. For this reason, the best option is utilizing a value-based pricing strategy. This strategy will satisfy the contribution margin, allow Cushion Pads to pick up all of the value from its product, and revolutionize the pile-driving industry. Recommendation for CMI Cushion Pads Pricing
Willingness to Pay: The new Cushion Pad is a desirable product not only because of its ability to reduce the amount of pads used for drilling overall, but because of the value it...