EXECUTIVE SUMMARY
Cumberland Metal Industries is evaluating a new product that makes pile driving less costly and more efficient. The product is a cushion pad made from curled metal that prevents the shock of a hammer from damaging the hammer or the pile. Currently the industry uses asbestos pads and is the only form of competition the company faces. If adopted there is potential to sell 29,000 to 39,000 sets of pads (6 pads per set) annually. The most important issue CMI management faces is setting the price of each pad, in the words of Robert Minicucci “ The way we price this could have a significant impact on everything else we do with it.” CMI will consider a range or pricing options such as cost based pricing, competitor based pricing and value based pricing. Correctly priced the pad will generate profit of approximately $800,000 in it’s first year. Along with pricing it is important that the industry is correctly informed of the cost savings of of the cushion pad in order to facilitate a change in the industry’s preference. SITUATION ANALYSIS
Company
Cumberland Metal Industries was one of the largest manufacturers of curled metal products, originally it customized components for technical applications but since then has moved to selling products that use metals as a raw material. It saw significant growth in sales from 250,000 to 18.5M over a span of 16 years since 1963. It’s biggest break through came with the EGR valves used in U.S. automobiles. Cumberland developed a product called Slip Seal which captured a very large percentage of available business, giving them an 80% percent market share. At this point however management wanted to diversify to reduce reliance on EGR valves and the automative industry. This is why CMI management was very interested when a sales representative from Houston presented CMI with a new product that uses curled metal technology as a raw material. Tightly compressed curled metal produced the Slip Seal, but when calendared and wound around an axis it produces a cushion pad for pile driving. In testing the curled metal lasted longer, eliminated the downtime to required for changeover and managed to conserve heat thus increasing it’s efficiency. Cushion pads also do not carry the health risks that asbestos pads do. Other benefits of the
product include a 33% faster driving time and the temperature of the CMI pads does not go above 250F (asbestos pads range from 600F to 700F) and so could be handled only wearing protective gloves. Customers
It was estimated that pile driving companies own approximately 13,000 pile hammers and that another 6500 to 13,000 were leased. Thomas Simpson assumed that the total of 19,500 to 26,000 hammers operate 25 weeks per year and that they would be used for 30 hours per week. He also estimates that the actual driving figure ( including time to change pads ) was 20 feet per hour. This amounts to 290M to 390M feet of piles driver annually, Then he also assumes that a set of metal pads would drive 10,000 feet. So 290M/10,000= 29,000 sets or 390M/10,000= 39,000 sets. In other words 29,000 * 6 or 39,000 * 6 = 174,000 or 234,000 individual pads per year could be sold. Competitors
Currently there are no other companies that are producing cushion pads using curled metal in the industry which means there is no direct competitor in the market to CMI. This is good news, however with there is the chance that a company may easily replicate the product. CMI may face some competition from asbestos manufacturers, but only where companies are unwilling or not convinced that the change is worth it. Currently there are no major manufacturers that dominate the business, infact they are mostly unbranded and carried by outlets as a necessary part of business. They usually are included with a purchase of a pile hammer. This means currently there is no significant competitor in the market, but CMI must take into account the possibility of a competitor that may copy their product and base their marketing with that in mind.
STRATEGIC OPTIONS
Cost Based Pricing
CMI management is looking for a 50% contribution margin and considers it’s overhead costs as fixed costs. Provided that CMI chooses to invest $50,000 the costs are as such: Manufacturing cost = 69.18
Contribution Margin (50% of selling price) = 69.18
Total Price = $138.36
WIthout investment:
Manufacturing Cost = 148.12
Contribution Margin(50% of selling price) = 148.12
Selling Price = $296.24
Using this method CMI can ensure it meets it’s contribution margin requirements, but this method does not consider the savings of efficiency and reduced change time. Competitor Based pricing
In this method CMI will price their products at a similar price to Asbestos pads. In the Colerick test the total number of sets of Asbestos pads used = 20 and cost per set = $50. The total cost of the job was $1000.00. In the Fazio Construction test the cost per set = $40 and number of sets used = 50. We can use this data to give us a range of how much the cushion pads should cost to be competitive. Colerick Total Cost for job = 20 * 50 = $1000Fazio Cost for job= 40*50=$2000 Number of Cushion Pads used= 6Number of Cushion Pads= 5
Cost per cushion pad = 1000/6= $166.67Cost per cushion pad=$400 To be competitive CMI must price their product in between this range, a good estimate is $300.00. Provided CMI invests in permanent tooling it will still provide a good profit and be a very competitive price. Value Based Costing
Value based Costing takes into account all the other savings that are a result of using the CMI cushion pad. Total number of hours saved for both Cleric and Fazio construction projects is 31.6 hours. The total cost of equipment is $94/hr and total cost of labour per hour is $44/hour. Total value per hour is = 31.6 * 138(94+44) = $4360.8. CMI has the opportunity to charge a premium for the extra savings. If it were to profit from all of the savings, the selling price is = 296.24 + 4360.8/6= $1,023.04
RECOMMENDATION
Cost Based Pricing allows CMI to make its contribution margin, and still allows it to compete with Asbestos. It would open doors for CMI very quickly and get customers interested in the product i.e. high market penetration. However it does not recognize the savings that the cushion pad provides.
Competitor based pricing has the same problem, although it would help penetrate the market very quickly, CMI would lose on profits it could earn by informing customers about the savings and enticing them into paying a high price. Customers are willing to pay a higher price to buy products with such a large amount of savings and so Value Based Pricing for this product is the correct approach. With Value Based Pricing CMI will break even faster, allowing it to pay off the permanent tooling costs and generate revenue to market the cushion pads better. With this approach they can lower prices later on to become more competitive if need be. This need will not arise if the industry is informed correctly and customers recognize the value the product brings to their projects. The key with this approach is that with CMI only taking 30% of the savings, the rest of the savings are passed onto the customers, and these savings will result in more market penetration. One important aspect of making sure this approach works is to patent their product to protect itself from competitors.
STAKEHOLDER ANALYSIS
PRICE
The right pricing method for this product is the Value Based Method and the exact retail price should allow some of the savings to be passed onto the customer, ideally 20%. So the exact retail price = 296.24 + 0.8(726.8)= $877.8 PROMOTION
One of the most important way to market the cushion pads will be through distributors. Customers trust long time distributors they have been dealing with to provide them with products and are more comfortable knowing distribution is already in place. They should also market to architectural and consulting engineers fully advising them on the benefits of the product and its advantages over the Asbestos pads. They should also be marketed through agencies that protect employees of construction companies, by advertising the health risks associated with asbestos pads and the benefits of reduced risks that cushion pads provide. By creating awareness of the reduced risks of cushion pads CMI can cause a change in industry standard, leading to an industry wide adoption of cushion pads.
REFERENCE
Shapiro, Benson O,; Sherman, Jeffrey J.. “Cumberland Metal Industries (HBS #9-580-104)” in Harvard Business School, pp. 1-18. August 16, 1985 the President and Fellows of Harvard College.
