EXECUTIVE SUMMARY
Cumberland Metal Industries is evaluating a new product that makes pile driving less costly and more efficient. The product is a cushion pad made from curled metal that prevents the shock of a hammer from damaging the hammer or the pile. Currently the industry uses asbestos pads and is the only form of competition the company faces. If adopted there is potential to sell 29,000 to 39,000 sets of pads (6 pads per set) annually. The most important issue CMI management faces is setting the price of each pad, in the words of Robert Minicucci “ The way we price this could have a significant impact on everything else we do with it.” CMI will consider a range or pricing options such as cost based pricing, competitor based …show more content…
The total cost of equipment is $94/hr and total cost of labour per hour is $44/hour. Total value per hour is = 31.6 * 138(94+44) = $4360.8. CMI has the opportunity to charge a premium for the extra savings. If it were to profit from all of the savings, the selling price is = 296.24 + 4360.8/6= $1,023.04

RECOMMENDATION
Cost Based Pricing allows CMI to make its contribution margin, and still allows it to compete with Asbestos. It would open doors for CMI very quickly and get customers interested in the product i.e. high market penetration. However it does not recognize the savings that the cushion pad provides. Competitor based pricing has the same problem, although it would help penetrate the market very quickly, CMI would lose on profits it could earn by informing customers about the savings and enticing them into paying a high price. Customers are willing to pay a higher price to buy products with such a large amount of savings and so Value Based Pricing for this product is the correct approach. With Value Based Pricing CMI will break even faster, allowing it to pay off the permanent tooling costs and generate revenue to market the cushion pads better. With this approach they can lower prices later on to become more competitive if need be. This need will not arise if the industry is informed correctly and customers recognize the value the product brings to their projects. The key with this approach is that with CMI only