Wermers Industries Inc. has developed a new drill press, model LS-88, that is designed to offer superior performance to a comparable drill press sold by Wermers's main competitor. The competing drill press sells for $31,000 and needs to be replaced after 1,000 hours of use. It also requires $6,000 of preventive maintenance during its useful life. ModelLS-88's performance capabilities are similar to the competing product with two important exceptions-it needs to be replaced only after 2,000 hours of use and it requires $7,000 of preventive maintenance during its useful life. From a value-based pricing standpoint what range of possible prices should Wermers consider when setting a price for model LS-88?

Question

Quizplus · Accepted Answer

The range of possible prices is as follows:
Reference value ≤ Value-based price ≤ EVC
The reference value is the price of the competing alternative, which is $31,000.
The economic value to the customer (EVC) is computed as follows:
EVC = Reference value + Differentiation value
The differentiation value has two elements. First, customers who purchase model LS-88 rather than the competing alternative would avoid the need to buy two of the competitor's drill presses for $31,000 rather than just one LS-88, to achieve 2,000 hours of usage. This is a savings of $31,000( = $31,000 × 1 additional component(s)) for the additional component(s) that would have to be purchased. Second, customers who purchase LS-88 rather than the competing alternative would realize preventive maintenance savings computed as follows:
 11eacbfc_c83b_5566_8ffe_37d9051e06e5_TB7552_00 Total differentiation value = $31,000 + $5,000 = $36,000
EVC = Reference value + Differentiation value = $31,000 + $36,000 = $67,000
Reference value ≤ Value-based price ≤ EVC
$31,000 ≤ Value-based price ≤ $67,000