Value-Based Pricing McDermott Company has developed a new industrial component called IC–75. The company is excited about IC–75 because it offers superior performance relative to the comparable component sold by McDermott’s primary competitor. The competing part sells for $1,200 and needs to be replaced after 2,000 hours of use. It also requires $200 of preventive maintenance during its useful life. The IC–75’s performance capabilities are similar to its competing product with two important exceptions—it needs to be replaced after 4,000 hours of use and it requires $300 of preventive maintenance during its useful life. Required: From a value-based pricing standpoint: 1. What is the reference value that McDermott should consider when pricing IC–75? 2. What is the differentiation value offered by IC–75 relative the competitor’s offering for each 4,000 hours of usage? 3. What is IC–75’s economic value to the customer over its 4,000-hour life? 4. What range of possible prices should McDermott consider when setting a price for IC–75?
Value-Based Pricing
McDermott Company has developed a new industrial component called IC–75. The company is excited about IC–75 because it offers superior performance relative to the comparable component sold by McDermott’s primary competitor. The competing part sells for $1,200 and needs to be replaced after 2,000 hours of use. It also requires $200 of preventive maintenance during its useful life.
The IC–75’s performance capabilities are similar to its competing product with two important exceptions—it needs to be replaced after 4,000 hours of use and it requires $300 of preventive maintenance during its useful life.
Required:
From a value-based pricing standpoint:
1. What is the reference value that McDermott should consider when pricing IC–75?
2. What is the differentiation value offered by IC–75 relative the competitor’s offering for each 4,000 hours of usage?
3. What is IC–75’s economic value to the customer over its 4,000-hour life?
4. What range of possible prices should McDermott consider when setting a price for IC–75?
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