Question

McDermott Company has developed a new industrial component called IC-75. The company is excited about IC-75 because it offers superior performance relative to the comparable component sold by McDermott's primary competitor. The competing part sells for $1,560 and needs to be replaced after 2,360 hours of use. It also requires $380 of preventive maintenance during its useful life. The IC-75's performance capabilities are similar to its competing product with two important exceptions-it needs to be replaced after 4,720 hours of use and it requires $480 of preventive maintenance during its useful life. Required: From a value-based pricing stanupoint 1. What is the reference value that McDermott should consider when pricing IC-75? 2. What is the differentiation value offered by IC-75 relative the competitor's offering for each 4,720 hours of usage? 3. What is IC-75's economic value to the customer over its 4,720-hour life? 4. What range of possible prices should McDermott consider when setting a price for IC-75? 1. Reference value 2 Differentiation value 3. Economic value to the customer 4 Range of possible prices <= Value-based price

Answer 1

Ans:

1. Reference value : This value would be the price of the competitive product:

Productive hours;2,360

Purchase cost= $ 1560

2. Differentiation value:This would be the net benefit from the given product:

Productive hours of IC-75	4,720
Extra productive hours (4,720-2,360)	2,360
Extra benefits of IC-75 (1560*2360/2360)	1,560
Add: Lower maintenance (380*4720/2360)-480	280
Differentiation value	$ 1,840

3. Economic value= reference value + differentiation value

= $ 1,840+1,560

= $ 3,400

4. Range of possible price =

Lower range= $1,560

Upper range= $ 3,400