Cumberland Metal Industry 1,2- The first two questions will be gone through together in order to avoid confusion.
Pricing is one of the most important elements to launch a product on the market. Mainly, because it is the only element, together with the marketing mix, that produces revenues. It is fundamental to set the right strategy in deciding and setting the price of a certain product to be sure that is fully understood and appreciated by customers in all its aspects and characteristics.A suggestion to rightly start the pricing strategy would be to follow a value based strategy, in order to understand what mostly consumers want and what price they would like to spend for that type of quality.
It is the reverse process of the cost-based strategy, so it is customer-driven. It is aimed to use buyers’ perceptions of value rather than sellers’ costs, to set price. First the company needs to assess customers needs and value perceptions, then set target price to match customers’ perceived value, afterwards determine the costs that the company itself can incur into, and design the product in the end.Afterwards, this company should choose a market skimming strategy, in order to set a high price for a new product to skim maximum revenues layer by layer from segments willing to pay high prices.
This is linked to a price to price strategy, but what the company can do more is also set a price promotion, like a discount in the beginning, because of the starting difficult situation in which the company has to convince customers that their product is much more reliable and more performing than the cheaper one made of asbestos.Thus, CMI also needs to adopt several marketing-mix programs such as advertising and roles of influencers to spread and fix the perceived value in customers’ minds. The estimation of the CMI product’s price starts from taking into consideration only the 11 ? pads because the company decided to focus on this segment at the beginning. So, the normal price of a 11 ? feet asbestos pad is 3 dollars; A CMI’s pad is much more resilient, and lasts much longer than the asbestos one.Thus, speed and efficiency, as it will be more and more repeated, will be the key factors, or much simpler the points of difference comparing the CMI one with the other, in marketing and pricing this pad. So, if we consider that CMI’s product lasts ten times more than the asbestos one, it could be possible to say that it would have a simple value of 30 dollars, but the question is not this easy, because if we take into account the data that came out from Colerick test, it is possible to gain much interesting information.
The feedback that came out of the test was that the performance given by a thousand-dollar-investment in asbestos pads to do a work equalled the same work of using six CMI’s pads for the same job, so it took 1000/6=166,7 worth of asbestos pad. From the Fazio test, instead, it took four hundred dollars worth of asbestos pads. Assuming that consumers care about speed and efficiency, CMI can charge additional price. From the first test, the coming out results of driving 50 feet into the ground using three hundred piles with asbestos pads was about twenty minutes on driving and four hundred minutes on set changing.
The CMI’s pads, instead, spent only fifteen minutes on driving and jusr four minutes on set changing. Here it is tangible and visible the huge advantage that the CMI’s pads give to the customers. This time advantage is more or less of six hours and fourty minutes, computing it by compounding the difference between the total times, per hour. Therefore, since contractors have to spend a hundred dollars per hour, Colerick, more or less, saves out 111 dollars on equipment rental, labor and overhead costs for this work by using CMI’s pads.
Computed all this data, it is possible to say that CMI’s pad is worth 166,7 + 111 = 278 dollars. Furthermore, CMI should opt for the option to purchase the fifty thousands permanent tooling, so to reduce cost per unit. Just considering this saved cash, the company would have back the initial investment in the tooling in less than three months, more or less; this would allow the company to maximize the long-term profit. The total manufacturing cost would be computed as seventy dollars per pad more or less; to this it should be considered that the management wants 40%-50% contributing margin after all manufacturing expenses.Thus, CMI pad’s price should be around a hundred and fifty dollars (150$, considering a 50% saving for the contractors).
Concluding the whole pricing process, a favourable hint to better succeed in the market and gain the profit maximization would be setting a discounted price at the beginning, in order to try to reduce the enormous distance between the two prices: three dollars for the asbestos pad, and more or less a hundred and fifty dollars for the CMI’s one. 3-This market is potentially very big because, there is still the possibility o penetrate it and become the monopoly of the market. To gain this huge competitive advantage the company, first, should protect itself from the threat of the new entrants, by the construction of high entry barriers. This could be done by the creation of a patent for the product formation, and high costs of entry in the market to prevent this product from being copied and imitated. As long as CMI did not get patent for this product, the company itself should not sell it since this cushion pad is not a high technology product, so easy to copy.To completely succeed and gain the monopoly the company should, then, first set the right price for consumers to buy, in order to eliminate the asbestos competition.
The product delivered by this competitor is less valuable and visibly worse in terms of time value and performance. However, it is a lot cheaper and, this is the real difficulty to overcome, but it also wastes a lot of time and heat, so the process gets interrupted a lot of times because of the turnover of the slabs, which also need to get a little cooler to get substituted.This process witnesses the fact that, once the CMI entered the market with its patented product, it would have a sustainable monopoly on the long run. Furthermore, what confirms the huge potential of this market is the fact that there is no brand distributing this type of product. Thus, following the pricing strategy mentioned before, the marketing mix of advertising, education and distribution will play a key role in ensuring the success of this product -The price that would be set by the CMI of course would affect the portion of the market they will get.
Once decided, it will stress the number of people that really believed in their good-quality product, and the percentage of the counterpart who relied on the asbestos product. As it was mentioned previously, the product made out of asbestos has a much lower price than the CMI’s one, but it also offers a lower quality product since there is a lot of waste of time and heat; thus, this means weaker performance.So the pricing strategy is one of the most relevant aspects of this product, as it was accurately explained in the first part. Therefore, as it was said before, a right suggestion to rightly start would be to follow a value based-strategy; if a cost-based strategy was followed, the company would not take into account the very important connection between price, product features and the customers’ willingness to pay.
CMI also needs to develop distribution channels, to reach contractors who own pile hammers. With the implementation of these channels the company would have more control on the education and could gain its customers’ feedbacks. CMI should deal with wholesalers and hardware stores to cover small contractors, and it would not be too concern on the equipment rental because customers will look for the pads more and more, once CMI’s product becomes popular.To achieve this awareness, the company should first develop promotional and advertising programs, to be sure to fix the pad’s value in customers’ minds.
Basically, CMI needs to make the customers understand not only the better performance in terms of time and quality, but also the benefits gained in health and safety. To conclude, one more important advantage, CIM could have, would be the result from Professor McCormack. This would help the company in establishing a network of influencers or increase public relations.
