Question

Brian and Company is a consulting group that offers fool-proof pricing and revenue optimization Service guaranteed to deliver $2M in Benefit to a customer. It cost Brian and Company $550k to provide this service. Unfortunately, they have a competitor, Dissenture that provides a similar, but somewhat inferior service that only delivers $1.5 M in guaranteed benefit. It also cost Dissenture $500k to provide this service. When competing with Dissenture, what price does Brian and company need to charge in order to guarantee that they win the business? Assume that neither Dissenture nor Brian and company will price below cost and that both of them know each other’s costs and the customer benefits in each case. How would Brian’s price need to change if it only cost Dissenture $400K to provide their service?

Answer 1

Let me assume that Brian and company would win maximum contracts when cost of service of brain and co is same as Dissenuture.

Now Brain and co offer guaranteed benefit of $2 million with cost at $550,000. Hence overall benefit excluding cost is

Benefit	2,000,000
cost	550,000
Net benefit	1,450,000

Dissenuture offer guaranteed benefit of $1.5 million at the cost of $500,000. Hence net benefit is

Benefit	1,500,000
cost	500,000
Net benefit	1,000,000

Now if we compare net benefit of both the companies, it is clear that Brain and co has $450,000 more net benefit then Dissenuture. Hence brain and co can charge any price upto $450,000 to be competitive.

Case 2: When Dissenuture cost reduces to $400,000

Benefit	1,500,000
cost	400,000
Net benefit	1,100,000

If I compare Net benefit of Brain and co with Dissenuture, it is clear that brain and co has $350,000 more than Dissenuture. Hence Brain and co can quote any price upto $350,000 to be competitive.