Question

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 $1,220 and needs to be replaced after 2,020 hours of use. It also requires $210 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 4,040 hours of use and it requires $310 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 4,040 hours of usage?

3. What is IC-75’s economic value to the customer over its 4,040-hour life?

4. What range of possible prices should McDermott consider when setting a price for IC-75?

Answer 1