Exercise 12A-3 Value-Based Pricing [LO12-10]

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 McDermotts primary competitor. The competing part sells for $1,260 and needs to be replaced after 2,060 hours of use. It also requires $230 of preventive maintenance during its useful life.

The IC-75s performance capabilities are similar to its competing product with two important exceptionsit needs to be replaced after 4,120 hours of use and it requires $330 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 competitors offering for each 4,120 hours of usage?

3. What is IC-75s economic value to the customer over its 4,120-hour life?

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