Cumberland Metal Industries: Engineered Products Division, 1980 – Foundation of Price.

 
1.    As indicated in the article “Pricing: A Value-Based Approach” by Robert J. Dolan
November 3, 2003 “getting pricing right” is a big deal.  However, pricing is often an afterthought
in corporate strategy.  If:
Profit = (Price – Cost) *Unit Sales
 
There is often more emphasis on the Cost and Unit Sales parts of the profit equation than Price. 
Price is seen as “determined by the market” or “something we really don’t have much control
over.” Marketers with this reactive attitude typically miss great profit opportunities. 
 
2.  Further in the article (November-December 1976) Pricing Policies for New Products by Joel
Dean it is mentioned that how to price a new product is a top management puzzle that is too
often solved by cost-theology and hunch. 
 
3.  Taking clue from these few observations and also the test cases performed by the Colerick
Test and Fazio Construction, and giving credence to the belief of Thomas Simpson, Group
Manager that a curled metal set life of 10 times more than asbestos and a performance increase
of 20% were probably more reasonable, the price determination has been attempted as under the
Colerick Test & Fazio Construction. 
Colerick Test:

Under this test the price of asbestos set was $50 and there were 20 number of set changes that
means it costed Colerick 50x20=$1000.
 
The time taken for affecting the changes was 20x20 minutes = 400 minutes ÷ 60 =6.4 hrs.
 
Average cost for real hour = 240x6=$1440.
 
So the price of the curled metal set has to be more than $1000, even if we do not take into
account the time saved / labor cost of $1440.
 
On the other hand, as per Simpson belief the price would be = 50x10=$500 + add 20%
performance increase (1440÷5=288).  So the total price would be $788.
Fazio Construction Case: 

In this case the cost of asbestos set was $40 and 50 set changes were made i.e. the price would be
50X40 = $2000.
 
Time saved / cost saved= 50x20 minutes = 1000 minute/60=16.40 hrs÷240=$3840.
 
So the Fazio price as per Simpson would be 40x10=$400 and 20% improvement means
(3840÷5=768) the price would be $1168.
 
The average of above two cases: 1000+788+2000+1168 = 4956÷4 = 1239.
 
Cost per pad = 1239÷6=$206.5
 
Price as per Cost Method:
Going by the cost price method estimated cost comes to $148.12 and $68.18 (with purchase of
$50,000 of permanent tooling) which gives an average of around $110.  Adding 50% of
contribution margin of selling price, the cost would be around 66%.  The selling price would
come to $164 per pad and $985 per set.

Thus costing method the price per pad is $164 and by selling price method the cost price is $207.

Following the pricing method and keeping in view that this is an innovative product for which lot

of advertising and publicity and distribution markups will have to be provided, the right price can

be quoted as $250 per pad.  Here it would be better to go with the equation Profit = (Price –

Cost) *Unit Sales where price will also matter a lot.