Question

Tavis Robotics Corporation has developed a new robot—model FI-73—that has been designed to outperform a competitor’s best-selling robot. The competitor’s product has a useful life of 10,000 hours of service, has operating costs that average $5.50 per hour, and sells for $127,000. In contrast, model FI-73 has a useful life of 30,000 hours of service and its operating cost is $3.50 per hour. Tavis has not yet established a selling price for model FI-73.

From a value-based pricing standpoint what is FI-73’s economic value to the customer over its 30,000 hour useful life?

Multiple Choice

$191,000

$314,000

$441,000

$241,000

Answer 1

The economic value to the customer (EVC) is determined as follows:EVC = Reference value + Differentiation value

The reference value is the price of the competing alternative, which in this case is $127,000.

The differentiation value has two components. First, customers who purchase a FI-73 rather than the competing alternative would avoid the need to buy three robots for $127,000 rather than just one FI-73 to achieve 30,000 hours of service. This is a savings of $254,000 (= 2 × $127,000) for the additional Robot that would have to be purchased. Second, customers who purchase a FI-73 rather than the competing alternative would realize operating cost savings computed as follows:

(5.5-3.5)*30000 = $60,000 . Differential value = 314,000

Economic value = 127000 + 314000 = $441,000 Answer