Cumberland Metals Case Study
The “Cumber-Coil”:
A Revolutionary Product for the Value-Conscious
SITUATION ANALYSIS
Cumberland Metals Industries developed a new type of cushion pad for pile drivers made of curled metal. The 11.5 inch “Cumber-Coil” was tested by two different companies on two different projects and was found to far exceed the performance of the existing market-dominant product, the asbestos pad. The Cumber-Coil weighed half what the asbestos pad did and boasted a 33% faster driving time, 60% reduction in heat generated, and 400% less time wasted changing pads.
The company that performed the first test was ecstatic with the results and has been pressuring CMI to sell them more Cumber-Coils. Since this is a brand new product unlike anything else available on the market, CMI must quickly settle on an amount to charge that will establish the reference price for their revolutionary product.
PRICING ALTERNATIVES
CMI has a number of options from which to choose when setting the Cumber-Coil’s initial price.
1) COST-PLUS: They could go with a cost-plus pricing method that would take into consideration all the costs involved with producing the product and then adding a fixed amount for gross margin. SIMPLE COST-PLUS | | Material Cost/pad | | $ 15.64 | | Labor Cost/pad | | $ 11.64 | | Factory Overhead (360%) | | $ 41.90 | | Total Manuf. Cost/pad | | $ 69.18 | | Desired GM | | 45% | | Cost-Plus Price Per Pad | | $ 125.78 | | Unit Cost / (1-GM)=Price | | |
By using the simple cost-plus pricing formula, we arrive at a price of $125.78/pad which translates into $754.68/set of six pads.
This price is not far outside the price range currently required to perform a job using the asbestos pads. To compare apples to apples, the cost of the required number of asbestos pads to drive 10,000 ft. (based on the results of the Colerick and Fazio tests) ranges from $700-1680.
A Revolutionary Product for the Value-Conscious
SITUATION ANALYSIS
Cumberland Metals Industries developed a new type of cushion pad for pile drivers made of curled metal. The 11.5 inch “Cumber-Coil” was tested by two different companies on two different projects and was found to far exceed the performance of the existing market-dominant product, the asbestos pad. The Cumber-Coil weighed half what the asbestos pad did and boasted a 33% faster driving time, 60% reduction in heat generated, and 400% less time wasted changing pads.
The company that performed the first test was ecstatic with the results and has been pressuring CMI to sell them more Cumber-Coils. Since this is a brand new product unlike anything else available on the market, CMI must quickly settle on an amount to charge that will establish the reference price for their revolutionary product.
PRICING ALTERNATIVES
CMI has a number of options from which to choose when setting the Cumber-Coil’s initial price.
1) COST-PLUS: They could go with a cost-plus pricing method that would take into consideration all the costs involved with producing the product and then adding a fixed amount for gross margin. SIMPLE COST-PLUS | | Material Cost/pad | | $ 15.64 | | Labor Cost/pad | | $ 11.64 | | Factory Overhead (360%) | | $ 41.90 | | Total Manuf. Cost/pad | | $ 69.18 | | Desired GM | | 45% | | Cost-Plus Price Per Pad | | $ 125.78 | | Unit Cost / (1-GM)=Price | | |
By using the simple cost-plus pricing formula, we arrive at a price of $125.78/pad which translates into $754.68/set of six pads.
This price is not far outside the price range currently required to perform a job using the asbestos pads. To compare apples to apples, the cost of the required number of asbestos pads to drive 10,000 ft. (based on the results of the Colerick and Fazio tests) ranges from $700-1680.