Eastman Tritan Pricing Case

Kenan-Flagler Business School        Paritosh Tiwari

Marketing 741        SECTION 8am

Executive Summary

I recommend that Eastman position Tritan as a revolutionary premium product in the Specialty Plastic segment and price it close to the value ceiling of $15.47/lb. Absence of a viable competition and significant benefits to customer (MegaTec) without loss in their margin allows Eastman to leverage a high price point for Tritan.

Pricing Schemes

Eastman is considering the following two price mechanisms- cost plus and value based. The cost plus pricing just adds a markup over the cost of manufacturing the product. This can be a good fit as it provides a definitive profit per unit sale. The value based model takes into account the customer willingness/economic utility to pay for a product and sets the price accordingly. This model can be highly profitable if the customers value the product more than what it costs to create the product.

Cost-Plus Pricing

Eastman expects a fixed margin of $1/lb for Tritan. With the cost of producing Tritan at $1.50/lb, Eastman could price Tritan at $2.50/lb. Do note the following regarding this price scheme:

Advantages:

• A definite profit margin (makes projection/budgeting easier)
• Simple model; cost of arriving at price is negligible and the price point can be easily justified
• Reduced cost of production can be transferred to reduced price which can improve sales

Risks:

• Customer value is not taken into consideration implying product can be overpriced or underpriced. Both scenarios will affect the company’s profitability
• Price fluctuation- change in cost of manufacturing will change price of product
• Market as a whole is not taken into account. Competitors, industry growth, economic growth, etc. are important factors to consider for pricing products

Value-Based Pricing

For determining the selling price to MegaTec, Eastman needs to account for the value differentiation of Tritan as compared to existing polycarbonates. The following factors are taken into consideration for deciding upon positive and negative differentiation:

• Amount of raw material used + delivery charges for this material
• Cost of manufacturing for MegaTec (injection process cost)
• Loss from providing free pitchers to customers (for MegaTec)

Assumptions:

Pitchers are sold at cost to customers. Hence the difference between polycarbonate and Tritan for additional pitchers sold for lifetime of blender (5 years) was not taken into consideration for value differentiation.

Steps for determining value based price

1. Average revenue gained from selling a blender (pitcher included) is $634. This is the base value
2. MegaTec additionally provides two free pitchers under warranty. The cost of these are $15.06 (Refer Table 2 & Table 4). MegaTec will save on this cost when using Tritan polymer
3. The negative differentiation value is $6.64 (Refer Table 2 & Table 4)
4. The value ceiling is calculated as $642.42 per blender for MegaTec
5. MegaTec is planning to charge additional $15 to its customers ($634+$15= $649). Hence, theoretically, Eastman can almost charge the maximum value of $15.47/lb to MegaTec. (Slight variation is present. Refer Table 5). The actual price range can be between $2.5 to $15.47

Advantages:

• Captures the actual customer willingness to pay for the product. In this scenario, Eastman makes more profit from value based pricing as compared to cost plus pricing
• Helps Eastman qualitatively and quantitatively understand the points of value differentiation which can provide a good roadmap for improving both the product and its pricing in the future

Risks:

• Competitors and overall market has not been taken into account while arriving at this price. Setting high margins can lead to scenarios where competitors start pricing their products aggressively forcing Eastman to drive down the selling price
• A sudden increase in cost of manufacturing (raw materials, processes, etc.) can lead to losses

Competitive Reactions

Several competitors are already in the process of developing products similar to Tritan. However, the launch is still about 18 months away. Hence competitors’ reaction will be focused on reducing market share capture by Tritan: