Weakly Industrial Products Inc. has developed a new industrial instrument, model CT-60, that is designed to offer superior performance to a comparable instrument sold by Weakly's main competitor. The competing instrument sells for $22,000 and needs to be replaced after 1,000 hours of use. It also requires $4,000 of preventive maintenance during its useful life. Model CT-60's performance capabilities are similar to the competing instrument with two important exceptions-it needs to be replaced only after 2,000 hours of use and it requires $6,000 of preventive maintenance during its useful life.Required:From a value-based pricing standpoint:a. What is the reference value that Weakly should consider when pricing model CT-60?b. What is the differentiation value offered by model CT-60 relative
to the competitor's instrument for each 2,000 hours of usage?c. What is model CT-60's economic value to the customer over its 2,000 hour life?d. What range of possible prices should Weakly consider when setting a price for model CT-60?
What will be an ideal response?
a. The reference value is the price of the competing alternative, which is $22,000.
b. The differentiation value has two elements. First, customers who purchase model CT-60 rather than the competing alternative would avoid the need to buy two of the competitor's instruments for $22,000 rather than just one CT-60 to achieve 2,000 hours of usage. This is a savings of $22,000 (=$22,000 × 1 additional component(s)) for the additional component(s) that would have to be purchased. Second, customers who purchase CT-60 rather than the competing alternative would realize preventive maintenance savings computed as follows:
| ? | Preventive maintenance cost for 2,000 hours of service: | ? |
| ? | Competitor's product ($4,000 × (2,000 hours ÷ 1,000 hours)) | $8,000 |
| ? | CT-60 ($6,000 × (2,000 hours ÷ 2,000 hours)) | 6,000 |
| ? | Preventive maintenance cost savings | $2,000 |
Total differentiation value = $22,000 + $2,000 = $24,000
c. The economic value to the customer (EVC) is computed as follows:
EVC = Reference value + Differentiation value = $22,000 + $24,000 = $46,000
d. The range of possible prices is as follows:
Reference value ? Value-based price ? EVC
$22,000 ? Value-based price ? $46,000
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