Bellini Robotics Corporation has developed a new robot-model EM-28-that has been designed to outperform a competitor's best-selling robot. The competitor's product has a useful life of 30,000 hours of service, has operating costs that average $1.40 per hour, and sells for $129,000. In contrast, model EM-28 has a useful life of 90,000 hours of service and its operating cost is $0.80 per hour. Bellini has not yet established a selling price for model EM-28.Required:From a value-based pricing standpoint:a. What is the reference value that Bellini should consider when pricing model EM-28?b. What is the differentiation value offered by model EM-28 relative to the competitor's offering for each 90,000 hours of service?c. What is model EM-28's economic value to the customer over its 90,000 hour
useful life?d. What range of possible prices should Bellini consider when setting a price for model EM-28?
What will be an ideal response?
a. The reference value is the price of the competing alternative, which in this case is $129,000.
b. The differentiation value has two components. First, customers who purchase a model EM-28 rather than the competing alternative would avoid the need to buy three robots for $129,000 rather than just one EM-28 to achieve 90,000 hours of service. This is a savings of $258,000 (= 2 × $129,000) for the additional robots that would have to be purchased. Second, customers who purchase a model EM-28 rather than the competing alternative would realize operating cost savings computed as follows:
| ? | Operating costs for 90,000 hours of service: | ? |
| ? | Competitor's product (90,000 hours × $1.40 per hour) | $126,000 |
| ? | Model EM-28 ((90,000 hours × $0.80 per hour) | 72,000 |
| ? | Operating cost savings | $54,000 |
Differentiation value = $258,000 + $54,000 = $312,000
c. The economic value to the customer (EVC) is computed as follows:
EVC = Reference value + Differentiation value = $129,000 + $312,000 = $441,000
d. The range of possible prices is as follows:
Reference value ? Value-based price ? EVC
$129,000 ? Value-based price ? $441,000
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