Question

Boback Industries Inc. has developed a new drill press, model DP-18, that is designed to offer superior performance to a comparable press sold by Boback's main competitor. The competing press sells for $88,000 and needs to be replaced after 29,600 hours of use. It also requires $59,200 of preventive maintenance during its useful life. Model DP-18’s performance capabilities are similar to the competing product with two important exceptions—it needs to be replaced only after 118,400 hours of use and it requires $148,000 of preventive maintenance during its useful life.

From a value-based pricing standpoint what range of possible prices should Schimpf consider when setting a price for model DP-18?

Answer 1

Solution :

EVC = Reference value + Differentiation value

The reference value is the price of the competing alternative, which in this case is $88,000.The differentiation value has two components. First, customers who purchase a DP-18 rather than the competing alternative would avoid the need to buy 4 drill press for $88,000 rather than just one DP-18 to achieve 118,400 hours of service. This is a savings of $264,000 (3 × $88,000) for the additional press that would have to be purchased. Second, customers who purchase a DP-18 rather than the competing alternative would realize operating cost savings computed as follows:

Preventive maintenance cost competitors product = $59,200 * 4 = $236,800

Preventive maintenance cost DP - 18 = $148,000

Operating cost saving = $236,800 - $148,000 = $88,800

Differentiation value = $264,000 + $88,800 = $352,800

EVC = Reference value + Differentiation Value = $88,000 + $352,800 = $440,800

Range of possible prices should Boback industries Inc. consider when setting prices for DP-18 on value based pricing standpoint = $88,000 ? Value-based price ? $440,800