What Should Cumberland Metals Set as the Price for Its New Product, one Standard-Sized Curled Metal Pad for Pile Driving?

What should Cumberland Metals set as the price for its new product, one standard-sized curled metal pad for pile driving?

Cumberland Metal Industries (CMI) was one of the largest manufactures of curled metal products in the United States at the time this case study was written – with $18,500,000 in sales in 1979.  At that time CMI relied heavily on their gas recirculation valve, known as SlipSeal, for a majority of their sales volume.  CMI dominated the market for this type of apparatus with 80% market share help by SlipSeal.  Due to this high market penetration, CMI executives realized the need to diversify their product offerings so that future sales growth can be achieved.  Curled metal cushion pads for use in the pile driving process of the construction industry was a concept product set to be launched by CMI.  It was estimated by VP of Engineered Products that a successful market introduction of this item could potentially double the sales of CMI.  But what should be the price? In order to assign an entry level price point for this new product, let’s analyze using the 3 most common pricing methods.  

Cost-based pricing: The simplest method whereas the fixed sum amount of total cost is added to the product cost and then company applies a percentage of mark-up to determine its selling price.  The total manufacturing cost to produce an 11 ½ inch pad is $148.12 with existing equipment. With the purchase of permanent tooling, the manufacturing cost to produce an 11 ½ inch pad drops to $69.18.  Although a capital expense of $50k would be needed to manufacture the pads with Permanent Tooling, the price per pad cost would be reduced by ~53% to $69.18 so this would be the obvious mode of production.

Competition-based pricing: 11 ½ inch asbestos pads have a retail price of $3.  However, the average pile feet driven per pad for asbestos was ~28.6 (Colerick: (15*55)/24 = 34.75; Fazio: (6*45)/12 = 22.5) and the CMI pads performance was projected at ~1,667 (10,000/6) pile feet per pad.  Therefore a true apples-to-apples competition based pricing model would use a factor of at least ~58 to determine a price point of the CMI pad when compared to asbestos.

Value-based pricing: This method takes a different approach, using potential value of the product brought to its customers as opposed to the cost the company incurred for production.  As a result of the two market tests at Colerick and Fazio evaluating asbestos vs curled metal pads, CMI determined that the tangible improvement to the customer was a 33% faster driving time.  Intangible factors that also brought additional value to the CMI product was ease of handling and improved safety.