Marketing - Eastman Case

Kenan-Flagler Business School        ANTRA CHOWDHURY

Marketing 741        SECTION 9:30am

Executive Summary

Considering the value-based pricing method, the value ceiling per pound of Tritan has been derived as $29.25, which would account for about 95% margin per pound of pellet for Eastman. Eastman’s deal with MegaTec would be the first test for the copolyester, Tritan in the blender market. Thus, the price of Tritan per pound should be attractive enough for MegaTec to enter the deal as well as it should be high enough to compensate for all the investments made by Eastman into Tritan’s research. Also, as polycarbonates are the market standard, there are many companies offering similar products for a lower price. Thus, taking in account all these parameters, Eastman should charge a price of $17.55 per pound of Tritan, which is about a margin of 91.45%. By using Value-based pricing, Eastman can earn a much higher revenue, which is about 14 times higher than that possible with cost-plus pricing (Table 3).

Pricing Schemes

Eastman considered two types of price mechanisms for making decisions about the price for MegaTac. These were the cost-plus pricing and value-based pricing techniques. In the cost-plus pricing technique, the product is sold at a price which has a fixed markup over the cost incurred to develop the product. This technique is generally useful in situations where the cost is not known in advance such as large development contracts. However, using the value-based pricing method, the products are priced on the basis of the benefits or value created for the consumers and not the exact costs of developing the product. This method of pricing is generally useful when a company wants to take advantage of the uniqueness or exceptional performance of the product. Thus, in Eastman’s context, value-based pricing appears to be more useful, as it would enable Eastman to charge a higher premium for its newly developed advanced product, Tritan.

Cost-Plus Pricing

For cost-plus pricing, the first step would be to identify the total cost of the product and thereafter fix the margin for sale. As given in Table 1, it can be observed that keeping the margin of Tritan same as that for polycarbonates i.e. 57.143%, the price of Tritan would be $3.50 per pound. If Eastman chooses to go with this price, then it would be able to capture the market by storm as with such a small change in price, it is providing a material which is about 20 times stronger than polycarbonates (as Tritan can sustain 1000 dishwasher cycles as compared to only 50 cycles for polycarbonates). However, at such a low price, Eastman would not be able to recover its costs incurred during research and development of Tritan.

Value-Based Pricing

For calculating the value ceiling for the blender, the average price of the blender, i.e. $634 has been considered as the reference value. The changes in value of the blender due to moving away from polycarbonates to Tritan are given below (as detailed in Table 2):

1. Savings of the replacement cost of polycarbonate pitchers that used to be damaged during the warranty period but now as Tritan is a stronger material, the pitcher will work for more than a year without replacement
2. Due to the increased durability of Tritan pitchers, MegaTec blender can receive differentiation in the market and the consumers will also be benefitted as their work won’t be suffered due to constant replacement of the pitcher. This increase in value can be estimated from the increase in price estimated by Eastman which shall be acceptable to the consumers without any reduction in sales.
3. Also, Eastman would need to bear an increase in the processing cost due to changing to Tritan pellets from polycarbonate pellets.
4. Further, the price of the raw ingredients for Tritan is higher than that for polycarbonate pitchers.

Using the above to calculate the differentiation value of $28.35, the value of price ceiling per blender is arrived at as $428.35 to $828.35, considering the price range of blender as $400-$800.  Using the same differentiation value adjusted for changes in the unit weight, the value of price ceiling per pound of Tritan was derived as $29.25.