First of all, the company should apply a patent for this new cushion pad. Since it is not a very advanced technology, if it goes public without having a patent, competitors must copy this technology. Therefore, the company should get the patent as soon as possible to ensure that it will be the only supplier of this technology and hence make the maximum profit. After that, to price this product, the company should apply the concept of perceived value to customers and make sure customers perceive the value.
A set of statistics taken from the Colerick Test:
The price of an 11.5 inch asbestos pad is $3.
During the Colerick Test, Colerick cost is $50*20=$1000, since 6 sets of new pad are used. $1000/6 = $166.67 can be assumed for the cost of each set of new pad. The job required 300 55-foot piles driven 50 feet into the ground. Albestos pads took 20 minutes to do so and 20*20 = 400 extra minutes for change. Meanwhile, the new pads only took 15 minutes and 4 minutes for change. Therefore, (420-19)/60 = 6.68 hours were saved. Since the cost per hour is $100, Colerick could at least save $668/6 = $111.33 per set of new cushion. Therefore, according to the statistics from the Colerick case, the new cushion should price at least for $166.67+$111.33 = $278.
The above calculation has omitted the value of time and efficiency. If those factors are also taken into account, the price can even be higher.
Moreover, the company should take the option to purchase the $50,000 permanent tooling. It is because much cost can be reduced. Take the 11.5 inch pad as example, $78.94 can be reduced from the cost per unit. It is estimated that the company can get back $50000 within a short period of time.
CMI’s pads definitely will be the market leader in the industry as it is innovative with high efficiency. Getting patent for this pad will ensure the growth profitability of CMI. In this case, perceived value pricing is used as the pad has more to offer than conventional asbestos.