Hilfiger Industries Inc.has developed a new forklift,model UH-40,that is designed to offer superior performance to a comparable forklift sold by Hilfiger's main competitor.The competing forklift sells for $96,000 and needs to be replaced after 1,000 hours of use.It also requires $9,000 of preventive maintenance during its useful life.Model UH-40's performance capabilities are similar to the competing product with two important exceptions-it needs to be replaced only after 2,000 hours of use and it requires $13,000 of preventive maintenance during its useful life. From a value-based pricing standpoint what is model UH-40's economic value to the customer over its 2,000 hour life?
A) $114,000
B) $197,000
C) $101,000
D) $192,000

Question

Quizplus · Accepted Answer

The economic value to the customer (EVC) is computed as follows:
EVC = Reference value + Differentiation value
The reference value is the price of the competing alternative, which is $96,000.
The differentiation value has two elements. First, customers who purchase model UH-40 rather than the competing alternative would avoid the need to buy two of the competitor's forklifts for $96,000 rather than just one UH-40 to achieve 2,000 hours of usage. This is a savings of $96,000 (=$96,000 × 1 additional component(s)) for the additional component(s) that would have to be purchased. Second, customers who purchase UH-40 rather than the competing alternative would realize preventive maintenance savings computed as follows:
 11ea7761_163d_c050_81a5_637c061954ed_TB2580_00 Total differentiation value = $96,000 + $5,000 = $101,000
EVC = Reference value + Differentiation value = $96,000 + $101,000 = $197,000