Wyler Logistic Solutions Corporation has developed a new forklift-model IM-40-that has been designed to outperform a competitor's best-selling forklift. The competitor's product has a useful life of 40,000 hours of service, has operating costs that average $1.30 per hour, and sells for $139,000. In contrast, model IM-40 has a useful life of 120,000 hours of service and its operating cost is $0.80 per hour. Wyler has not yet established a selling price for model IM-40.Required:From a value-based pricing standpoint what is the differentiation value offered by model IM-40 relative to the competitor's offering for each 120,000 hours of service?
What will be an ideal response?
The differentiation value has two components. First, customers who purchase a model IM-40 rather than the competing alternative would avoid the need to buy three forklifts for $139,000 rather than just one IM-40 to achieve 120,000 hours of service. This is a savings of $278,000 (= 2 × $139,000) for the additional forklifts that would have to be purchased. Second, customers who purchase a model IM-40 rather than the competing alternative would realize operating cost savings computed as follows:
| ? | Operating costs for 120,000 hours of service: | ? |
| ? | Competitor's product (120,000 hours × $1.30 per hour) | $156,000 |
| ? | Model IM-40 ((120,000 hours × $0.80 per hour) | 96,000 |
| ? | Operating cost savings | $60,000 |
Differentiation value = $278,000 + $60,000 = $338,000
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