Mounger Industrial Products Inc. has developed a new industrial forklift, model CZ-03, that is designed to offer superior performance to a comparable forklift sold by Mounger's main competitor. The competing forklift sells for $27,000 and needs to be replaced after 1,000 hours of use. It also requires $3,000 of preventive maintenance during its useful life. Model CZ-03's performance capabilities are similar to the competing forklift with two important exceptions-it needs to be replaced only after 4,000 hours of use and it requires $6,000 of preventive maintenance during its useful life.Required:From a value-based pricing standpoint what is the differentiation value offered by model CZ-03 relative to the competitor's forklift for each 4,000 hours of usage?
What will be an ideal response?
The differentiation value has two elements. First, customers who purchase model CZ-03 rather than the competing alternative would avoid the need to buy four of the competitor's forklifts for $27,000 rather than just one CZ-03 to achieve 4,000 hours of usage. This is a savings of $81,000 (=$27,000 × 3 additional component(s)) for the additional component(s) that would have to be purchased. Second, customers who purchase CZ-03 rather than the competing alternative would realize preventive maintenance savings computed as follows:
| ? | Preventive maintenance cost for 4,000 hours of service: | ? |
| ? | Competitor's product ($3,000 × (4,000 hours ÷ 1,000 hours)) | $12,000 |
| ? | CZ-03 ($6,000 × (4,000 hours ÷ 4,000 hours)) | 6,000 |
| ? | Preventive maintenance cost savings | $6,000 |
Total differentiation value = $81,000 + $6,000 = $87,000
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