Schimpf Industries Inc.has developed a new grinder,model WC-13,that is designed to offer superior performance to a comparable grinder sold by Schimpf's main competitor.The competing grinder sells for $24,000 and needs to be replaced after 1,000 hours of use.It also requires $2,000 of preventive maintenance during its useful life.Model WC-13's performance capabilities are similar to the competing product with two important exceptions-it needs to be replaced only after 4,000 hours of use and it requires $5,000 of preventive maintenance during its useful life. From a value-based pricing standpoint what range of possible prices should Schimpf consider when setting a price for model WC-13?
A) $24,000 ≤ Value-based price ≤ $99,000
B) $75,000 ≤ Value-based price ≤ $96,000
C) $24,000 ≤ Value-based price ≤ $96,000
D) $75,000 ≤ Value-based price ≤ $99,000

Question

Quizplus · Accepted Answer

The range of possible prices is as follows:
Reference value ≤ Value-based price ≤ EVC
The reference value is the price of the competing alternative, which is $24,000.
The economic value to the customer (EVC) is computed as follows:
EVC = Reference value + Differentiation value
The differentiation value has two elements. First, customers who purchase model WC-13 rather than the competing alternative would avoid the need to buy four of the competitor's grinders for $24,000 rather than just one WC-13 to achieve 4,000 hours of usage. This is a savings of $72,000 (=$24,000 × 3 additional component(s)) for the additional component(s) that would have to be purchased. Second, customers who purchase WC-13 rather than the competing alternative would realize preventive maintenance savings computed as follows:
 11ea7761_1640_f4a5_81a5_59624ec3e38e_TB2580_00 Total differentiation value = $72,000 + $3,000 = $75,000
EVC = Reference value + Differentiation value = $24,000 + $75,000 = $99,000
Reference value ≤ Value-based price ≤ EVC
$24,000 ≤ Value-based price ≤ $99,000