Question

This is the reading and questions follow after.

Shine-Ola Premium Bulbs: the Pricing Decision

Voll Taik, the marketing manager for a new lighting start-up was very interested in the concept of Value-Based pricing that he had heard about in his M300 course in the Kelley School at Indiana University. He was wondering how he might apply the concept to a situation facing his company “Shine-Ola”.

The new product, “Shine-Ola Premium Bulb”, was a LED (Light Emitting Diode) technology and was dramatically better than competing lighting solutions available on the market. Competing solutions included standard incandescent bulbs and compact fluorescent lighting, (CFL).

Extensive laboratory testing and installed residential testing had demonstrated dramatic results. Not only did the Shine-Ola Premium Bulb last longer than conventional bulbs, it used significantly less power over its life. Because of this power saving, residential users spent less on electric power for lighting measured in price per kilowatt (kWh) hour. In addition, the Shine-Ola bulb significantly reduced the inconvenience and cost of having to replace lightbulbs as often as traditional bulbs burned out. Nationally, service rates averaged $48 for changing 1-5 light bulbs, compared to $62 for 6-10, $87 for 11-15, and $114 for 16-20 bulbs.

Voll knew that the Shine Ola Premium Bulb tested well on other lighting performance measures as well. The Shine-Ola Premium Bulb had been rated by an independent testing agency and compared favorably on several dimensions including: the bulb emitted less heat than other bulbs; the Shine-Ola Premium Bulb was more durable than other types of bulbs. The Shine-Ola bulbs were not sensitive to humidity, and the bulbs contained no hazardous materials such as Mercury.

The Shine-Ola Premium bulb also improved lighting aesthetics. The bulbs put out higher lumens, which provided an estimate of the apparent amount of light a bulb would produce (higher lumens = more perceived light). Finally, the Shine- Ola Premium Bulb had a higher color rendering index (CRI) than competitor’s bulbs. The CRI represents the quality of light and its ability to render colors correctly. These aesthetic factors would improve the lighting environment for such activities as reading, doing detailed work, art display and coordinating interior designs.

Voll was very excited about all the features of the Shine-Ola Premium bulb, and he had focused on the residential market. He thought that residential consumers would present the best opportunity for Shine-Ola because residential electrical rates (per KWh) were the most expensive. Furthermore, Voll knew from industry statistics that the average American home contained 47 incandescent bulbs.

However, Voll also wondered if he and his company should be thinking about the industrial or commercial market segments, even though the electrical rates were lower than consumer residential rates.

Shine-Ola’s engineering staff had studied the bulb’s performance to determine if the benefits of the Shine-Ola bulb improved workplace productivity. They determined that productivity increased by as much as 10% in some industrial and commercial applications.

Shine-Ola’s market researchers argued that the bulbs could help create a better, more enjoyable, shopping experience for customers in retail stores. Voll knew that improvements in retail shopping experience were directly correlated to increased retail sales. One study in California concluded that “Daylighting” a retail store increased a store’s sales by 6%.

Voll knew that although there NO competitors in the LED lighting segment yet, that if he were successful, new entrants would develop their own technology and could enter within three years.

Figure 1 shows an initial basic comparison of the costs of the new Shine-Ola Premium Bulb with more conventional bulbs on the market. Voll needed some advice from current M300 students.

Here are the Questions:

Voll had two basic questions that students needed to answer.

First, what is the “Economic Value to the Consumer” (EVC), or “Total Economic Value” (TEV), (the terms are considered to be interchangeable) of the Shine-Ola Premium Bulb for the residential segment of the market?

The EVC or TEV is a calculation you should make. (show all your work leading up to the calculation)

Second, recommend a specific pricing strategy for the retail price for the Shine-Ola Premium bulb (for example, “penetration” or “skim” pricing). Assume that there are no competitors and that it would take at least three years for any competitor to enter the market.

Recommend a specific retail price/bulb and a persuasive marketing rationale for setting both the pricing strategy you recommend and your recommended price per bulb.

Answer 1

1)Economic Value to the Consumer = Benefits of LED bulbs / Cost of LED bulbs

= Power saving + Long life + Less Heat + Higher color rendering index / Higher cost of LED Bulbs

As the benefits are much higher than the cost of LED bulbs , so LED bulbs have higher Economic Value to the consumer.

2) As there are no competitors in the market and it would take at least three years for any competitor to enter the market, so skim pricing is a better pricing strategy for Shine-Ola Premium bulb. Shine-Ola can charge high price in the beginning to generate maximum profits because of its innovative technology and thus attract the creamy layer of the customers till the time other competitors enter the market. Later they can slash down the price , so as to attract the next layer of customers and generate higher revenue.

Shine-Ola can charge $55 for the bulb and thus can attract large number of customers.