To address your immediate need from Kendrick Foundation Company (‘KFC’) for a price quote on Curl Metal Cushion Pads (Cushion pads or ‘CMCP’), it would be beneficial to establish a proper pricing strategy. It may also be beneficial to not only consider the short term, but also the potential long term pricing strategy for future consumers as well. To estimate the value price or price premium, it is advisable to keep in mind perceived value added propositions for your consumer. Also, as with most products, it is meaningful to perform a margin analysis based on potential pricing to customers to determine profitability of the overall product venture. Last but not least, external competition should also be considered as a factor on your product price. First, based on the information given, relative pricing analysis can be performed utilizing information from consumer purchases of conventional pads. Based on the price paid for the conventional pads for each project, it can be assumed the customer is willing and able to pay comparable pricing for CMCP (assuming the same benefits are created for users).
A higher value price can be created by emphasizing the additional features or benefits of utilizing CMCP versus the conventional pads. The main additional features include more efficient pile driving time and less required time for change (overall less labor utilized), this value proposition can be estimated based on labor cost savings. In addition, CMCP are generally safer than the conventional pad, while the measurement of this value/benefit may be harder to measure, it is yet another selling point that could increase the price premium the customer is willing to pay for CMCP. For purposes of having a measurable pricing strategy, the focus of this analysis is on labor time savings. Assuming the average cost per Real Hour is $63/Hour for labor (HBS – Curled Metal Inc – Table A), and the willingness to pay for the material itself is same as what the customer paid for the conventional pads, the additional benefit from labor time saved (utilizing conventional pad as bench mark) can be considered cost savings to customers therefore, addition to customer perceived value.
Table 1 – Revenue Analysis exhibits the cost to customer for purchases of conventional padding (project based), this cost plus the labor cost savings switching from conventional pads to CMCP translates to an estimated per unit customer value price for CMCP. With comparable data collected for the two test customers, the estimated value pricing is $765/pad (based on selling 6 pad sets) and $1,392/pad (based on selling 5 pad sets) for size 11 ½, and $339/pad (based on selling 6 pad sets) for size >11 ½ Inch. This is evident of the upward price we can charge the customers, also, a differentiated price can be based on volume sold per set. To continue the flow of the discussion and to be conservative, we will assume the remaining discussion pertains to selling sets of 6 or at the $765/Unit (11 ½ Inch pad price) and $339/Unit (>11 1/2 Inch pad price). Second, margin analysis is necessary to determine profitability based on the aforementioned customer value pricing.
Table 2 – Cost/Margin Analysis calculates the profitability per unit for short term (250 Units Production) and long term (500 Units Production), this analysis utilizes the estimated perceived value calculation along with prior information provided (HBS – Curled Metal Inc – Exhibit 6). Analysis is performed for the most popular sizing – 11 ½ inch pad, along with two other product lines to expand the production consideration. Result of the analysis concludes the 11 ½ product is most profitable among the three products. In regards to your consideration of whether to expend $150K on permanent tooling, based on our analysis, it does result in higher profit margin than using your original equipment. However, this is given that there is enough customer demand to cover the cost of the additional tooling. Lastly, based on the analysis, COGS will also decrease as production increases even with the additional spend for equipment (comparison of 500 units vs. 250 units produced).
With uncertainty on market demand, and with limited resources on marketing research efforts, I would advise you to hold off on permanent tooling purchase until demand is more certain. Third, competitors and substitutable products could have an impact on product price. Since CMCP is the first of its kind to enter the market, you will have first mover advantage, however, competitors could enter the market with a similar product and additional pricing strategies, such as rebates/discounts or changes to list price may need to be considered. While it is not a huge concern during product launch period, it should something to be cognizant of in case the product proves to be profitable.
Further analysis should be performed to ensure maximum customer price value is captured. Based on the aforementioned information, I would suggest focusing efforts on the 11 ½ inch CMCP and charging the customers upwards of $765/Unit (based on selling sets of 6 pads) and $1,392/Unit (based on selling sets of 5 pads). In the short run, I would advise not to purchase the additional permanent tooling cost until there is more certainty around the demand for the product. In the long run, with proven sales records, the company can benefit from additional operational efficiencies from higher volume production. If you have any further questions regarding this, please do not hesitate to reach out to me.