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 $4.60 per hour, and sells for $109,000. In contrast, model FI-73 has a useful life of 30,000 hours of service and its operating cost is $2.60 per hour. Tavis has not yet established a selling price for model FI-73.
-From a value-based pricing standpoint what range of possible prices should Tavis consider when setting a price for FI-73?
A) $187,000 ≤ Value-based price ≤ $278,000
B) $109,000 ≤ Value-based price ≤ $187,000
C) $109,000 ≤ Value-based price ≤ $387,000
D) $278,000 ≤ Value-based price ≤ $387,000

Question

Quizplus · Accepted Answer

The range of possible prices is determined as follows:
Reference value ≤ Value-based price ≤ EVC
EVC = Reference value + Differentiation value
The reference value is the price of the competing alternative, which in this case is $109,000.
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 $109,000 rather than just one FI-73 to achieve 30,000 hours of service. This is a savings of $218,000 (= 2 × $109,000) for the additional robots 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:
 11ea7761_164c_dbae_81a5_6f64f8867de7_TB2580_00 Differentiation value = $218,000 + $60,000 = $278,000
EVC = Reference value + Differentiation value = $109,000 + $278,000 = $387,000
Reference value ≤ Value-based price ≤ EVC
$109,000 ≤ Value-based price ≤ $387,000

Tavis Robotics Corporation Has Developed a New Robot-Model FI-73-That Has