Trueba Electronics Corporation has developed a new testing instrument-model JJ-92-that has been designed to outperform a competitor's best-selling instrument. Model JJ-92 has a useful life of 100,000 hours of service and its operating cost is $0.50 per hour. In contrast, the competitor's product has a useful life of 20,000 hours of service and has operating costs that average $0.80 per hour. The competitor's instrument sells for $109,000. Trueba has not yet established a selling price for model JJ-92.Required:From a value-based pricing standpoint:a. What is the reference value that Trueba should consider when pricing model JJ-92?b. What is the differentiation value offered by model JJ-92 relative to the competitor's offering for each 100,000 hours of service?c. What is model JJ-92's
economic value to the customer over its 100,000 hour useful life?d. What range of possible prices should Trueba consider when setting a price for model JJ-92?
What will be an ideal response?
a. The reference value is the price of the competing alternative, which in this case is $109,000.
b. The differentiation value has two components. First, customers who purchase a model JJ-92 rather than the competing alternative would avoid the need to buy five instruments for $109,000 rather than just one JJ-92 to achieve 100,000 hours of service. This is a savings of $436,000 (= 4 × $109,000) for the additional instruments that would have to be purchased. Second, customers who purchase a model JJ-92 rather than the competing alternative would realize operating cost savings computed as follows:
| ? | Operating costs for 100,000 hours of service: | ? |
| ? | Competitor's product (100,000 hours × $0.80 per hour) | $80,000 |
| ? | Model JJ-92 ((100,000 hours × $0.50 per hour) | 50,000 |
| ? | Operating cost savings | $30,000 |
Differentiation value = $436,000 + $30,000 = $466,000
c. The economic value to the customer (EVC) is computed as follows:
EVC = Reference value + Differentiation value = $109,000 + $466,000 = $575,000
d. The range of possible prices is as follows:
Reference value ? Value-based price ? EVC
$109,000 ? Value-based price ? $575,000
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