Cumberland Case free essay sample

According to the six stages of setting price, ? we have to select the pricing objective. Since Cumberland is in the level of introducing CMI, they have to pursue product-quality leadership which is to offer â€Å"affordable luxuries† for now and consider about maximizing profit later. ?The second stage is to determine demand. So, Cumberland has to consider consumers’ price sensitivity in this case sensitive to quality. Therefore, we should think about the benefit to consumers. Since the average number of CMI pads need per year is 204,750(question 2), the number of CMI pads per month is about 17,000. So, the additional capacity cost is $5,025,000 because additional equipment is added at a cost of $75,000 per 250 pads per month of capacity {(17,000/250 – 1)x75,000}. The production cost varies depending on purchasing a permanent tool. (Exhibit 6)Without permanent tool, it has to pay $7,543,040{148. 1217,000+5,025,000(additional capacity cost)}. On the other hand, with the permanent tool, manufacturing cost would be only ,251,060{69. 817,000+50,000(price of permanent tool)+5,025,000(additional capacity cost)}. Compared to without permanent tool case, it is reasonable to produce pads ‘with permanent tool’. So the total manufacturing cost would be $6,251,060 and the manufacturing cost per pad goes to $367. 71(6,251,060/17000). Since Cumberland managements want to take manufacturing cost to be 40~50% of the price. From this, we can set the price range of from $735. 42. to $919. 275. ?Next, we should analyze competitors’ price mix. Competitors of this market are companies producing asbestos pads. The advantage of competitors is low price. Thus Cumberland has to make sure the value it offers is always of higher benefit to customers than asbestos pad’s cheapness. ?From this, it follows that the ceiling price should be about $1,904. 16 and floor price about $735. 42 and its median is $1,319. 79. After this, we select a pricing method of markup pricing. Because we are beginning the production, we have to first accomplish desired return on sales to make up for the costs. ?Lastly, we select a final price with this method. As gather up former steps, although CMI pad’s EVC is very high and consumer will be welcome this product, since it is the beginning and the key point is to penetrate market and take consumer’s interest, S875. 5 of which 42% is manufacturing cost is moderate to CMI pad. Q1-2) What is the best estimate of the value of the Cumberland pad to a customer? First, in the Colerick project, Asbestos pads driving rate is 150ft/hr so it takes 100 hours driving 15,000ft. When driving 15,000ft, it needs 20 pad sets. Also, because it spends 20 minutes to change sets, it takes total of 400minutes to change sets. As a result, total time spending on driving 15,000ft would be 106. 66666hrs (100hrs+400mins). However, the driving rate of CMI pad is 200ft/hr and it takes 75hrs to drive 15,000ft. CMI needs only 1 pad set change which takes only 4minutes. So, driving 15,000ft with CMI pad spends 75. 06666hrs (75hrs+4mins). It saves 31. 6hrs than the Asbestos pad. Second, in the Fazio project, the driving rate of Asbestos pads is 160ft/hr and it takes 75hrs driving 12,000ft. In this case, 50 pad sets is needed to replace and it takes 20minutes per set to change. So it needs 1000mins for total changes. Overall, using Asbestos pads needs 91. 66666hrs (75hrs+1000mins). On the other hand, CMI in Fazio project shows same result with Colerick project that is taking 60. 06666hrs. In summary, it saves 31. 6hrs when using CMI pad. Furthermore, there are other equipment’s rental costs. Hammer costs $34/hr, crane costs $52/hr and lead costs $8/hr. Also, labor cost is $21, crane operator costs $10 and foreman costs $13. In addition, $100 is needed for overhead which is spent on office, trucks, oil/gas, tools etc. In sum, $238 is spent per hour. To sum up, the value of the time saved by using CMI pad is $7,520. 8 in the case of Colerick project and the Fazio project. The cost for the Asbestos pads is $1,000 in Colerick project-$50 per set and 20sets required. Also Asbestos pad cost is $2,000 in Fazio project-$40 per set and 50 sets required. In conclusion, Total value saved by using the CMI pad becomes $8,520. 8($7,520. 8 + $1,000) in Colerick project and $9,520. 8($7,520. 8 + $2,000) in Fazio project. Therefore, the value of the CMI pad to a customer is $1,420. 1333($8,520. 8 / 6pads required in total) in the Colerick project and $1,904. 6($9,520. 8 / 5pads required in total) in Fazio project. The highest estimate of the value of the CMI pad to a customer (EVC) is $1,904. 16 per pad. Q1-3) EVC of channel members, and influencers The value of CMI may be evaluated positively but not all share the same estimate of value. At first, customers will be positive because their EVC is $1,904. 16. Channel members would also be positiv e. They can get more margins because CMI pad is much more expensive than asbestos pad. Also architectural/soil consultant can construct fast and easily because CMI pads quailty and safety is better. In place of Engineering/construction contractors and independent pile-driving contractors, it will be estimated positively because they want to construct safely and fast. However, Pile-hammer distributing/renting companies make profits from rental fee. So when constructors reduce construction times using CMI Pad, their profits also be removed. So they are going to estimate negatively on CMI pads value. 2. Because there is no actual statistics of the U. S. market for cushion pads, Thomas Simpson, group manager of the Mechanical Products Group, estimated the market size by the information he could gather. A 1977 report by Construction Engineering magazine and industry sources estimated that there are approximately 13,000 owned pile hammers and 6,500 to 13,000 leased hammers. These total of 19,500 to 26,000 hammers would operate for 25 weeks in a year, and 30 hours in a week. Most works are drove 20 feet per hour. From these data we can estimate the total feet driven per year. Low Estimate: (13,000+6,500) x 25 x 30 x 20 = 292,500,000 High Estimate: (13,000+13,000) x 25 x 30 x 20 = 390,000,000 A set of six curled metal pads would drive 10,000 feet, which means that 1,667 feet is driven per pad. Therefore we can estimate the number of CMI pad needed per year. Low Estimate: 292,500,000 / 1,667 = 175,500 , High Estimate: 390,000,000 / 1,667 = 234,000 From this, we can estimate the average number of pads need per year and it is 204,750. 3. Q3-1) Distribution amp; Marketing Methods Before choosing a marketing strategy, we should first understand what product we are dealing with. CMI pad is a unsought goods that people generally don’t use. Thus, the target segments of this market are not public but those who have pile hammers such as pile driving companies, pile driving contractors, or construction contractors. Also, a market for pads is unfamiliar notion in the industry. Most members of the pile-driving industry did not think of a cushion pad as a prospective product to promote. CMI is the first pioneer in this market and the market is not clear. Thus, channels of distribution are not clear, too. We considered several alternatives including launching its’ own distribution outlet. However, for many obstacles, we decided that founding an outlet will cost a lot. Rather, as a result, we determined to persuade construction-oriented manufacturers’ representatives as a distribution channel with the result from question 1, 2. To communicate CMI product to market, it is important to reach various purchase influences. Then, what kind of purchase influences are important and why? There are architectural/consulting engineers, engineering/construction contractors and independent pile-driving contractors. Independent pile-driving contractors are those who are pioneers of this market, so they would be the key to introduce CMI to market. The architectural/consulting engineers are those who are expertise and final decision makers of the needs for a construction project. Even though they themselves don’t buy the product, they would tell consumers to buy it. So, we should make them choose CMI pads. Also, engineering/construction contractors are people who do everything related to the piling. They are bigger and sophisticated than independents that they would guarantee the bigger success in this market. As our targeting customers are industrial engineers and contractors not general public customers, we should focus on advertising directly for those segments rather than public advertisements like TV commercial, news paper and so on. There are several ways to reach these targets. We can put an ad on some magazines featuring advertisements by suppliers to trade and supply houses like Louisiana Contractor. Also, to reinforce credibility and arouse people’s interest, test results from the Colerick Foundation Company and Fazio Construction can be attached. The positive feedback from Professor R. Stephen McCormack about CMI pad can be attached, too. Moreover, we can hold trade shows to introduce CMI pads directly to the potential buyers and influencers. This would enable the company to have better marketing effect with small cost than widespread ads. Also, we can offer some free samples to some major companies and independent pile-driving contractors to draw their interests, just like we got some from the Colerick and Fazio. With these methods, CMI can be marketed effectively to the target segment. Q3-2) Roles of competitors, context, and collaborators in pricing decision In question 1-1, we already concluded competitors are asbestos pads companies. As test results prove, CMI pad is more competitive than them in every feature. So, if Cumberland gets a patent for CMI pad, no product can beat CMI. Since the only advantage of asbestos pad is low price, we should be careful not to overprice CMI pad that people no longer feel the advantages of CMI. The collaborators of Cumberland are Colerick and Fazio who cooperated to test CMI. Cumberland could calculate estimate value of consumers from the test results they gave. With EVC, Cumberland can set a price that ensures consumers to get higher value than the price. In other words, collaborators help setting the ceiling price of CMI. In exhibit 1, we can see that income of Cumberland diminished in 1979 compared to 1978. Net sales decreased from about $20. 5M to $18. 5M and net income per share decreased from $2. 16 to $1. 39. Even though Cumberland had a large market share in automakers market by selling exhaust gas recirculation (Sip-Seal), they depended on this market and its income has shrunk. They needed to target new market to retain other stable source of income. Therefore, it is natural that they develop CMI pads. Unlike asbestos pad, CMI pad is made of various materials. Also, CMI pad doesn’t endanger crew’s life by never going above 250? asbestos pads’ average temperature is between 600? and 700? ) So, engineers will choose CMI pad over asbestos for security reason. So, Cumberland can give premium to the CMI to have investment cost covered. Although CMI pad is a great product, Cumberland has to sit back and take relatively low-price strategy. That is, to gain market share and to have investment cost rewarded, Cumberland has to set a price that is not too low or too high – in this case the price is of 50% margin. They might be able to increase the price after they have enough market shares.