Though pile driver pads had always been used, this can be considered a new product category because nobody, to date, had taken the initiative to promote a product specifically for the purpose of padding pile drivers. Additionally, because it is a vague product category to start with, distribution channels for pile driver pads also remains ambiguous. CMI decided to contract with construction-oriented independent sales representatives. These intermediaries would focus on key accounts in their respective geographical territories, like major distributors and supply houses.
`Recommendations
Demand Forecasting & Production Planning
Total industry demand for feet of piles driven is between 290,000,000 and 390,000,000 annually. Because each unit (or set of pads) that CMI produces can last for about 10,000 driven feet, annual demand potential could span from minimum of 29,000 units to a maximum of 39,000 units. Broken down monthly, the chart in Figure 1 describes production needs to meet demand at varying intervals of anticipated market share.
Since this is a new product, it would be wise to conservatively forecast a smaller market share in the first quarters the product is on the market. Let’s start by estimating a 25% market share in Quarters 1 and 2, followed by a 50% market share in Quarters 3 and 4. This leads us to infer the production forecast provided in Figure 2.
The breakeven point for purchasing the additional $50,000 in permanent tooling occurs between 500 and 750 units (Figure 3). It is recommended that CMI purchase the permanent tooling enhancements within the first year to lower total manufacturing cost per unit. The $50,000 cost can easily be distributed over several years with the right loan. It need not be paid in full during the first year. Total costs per unit, despite the aid of the initial tooling expense, does not start falling until production quantity reaches approximately 3,750 units (Figure 4).
Contribution Margin Goals
CMI sets contribution margin goals between 40% and 50% of the selling price. By calculating contribution margin as net sales (quantity 4500 units for Year 1 * price) less variable costs, we can see that optimal pricing range for the new metal cushion pads is between about $45.45 and $54.60 (for contribution margins of 40% and 50% respectively). However, this methodology doesn’t take into account how much value is being left on the table between CMI and the customer.
Actual Consumer Value
Another way to approach pricing is to calculate the value of CMI’s curled metal pads to the consumer. Figure 6 shows the raw data used to compare the performance of asbestos padding versus CMI’s new curled metal padding in trials conducted by two contractors: Colerick and Fazio. Cutting the amount of job time for pile driving is where the savings are really going to add up. For example, one hour’s worth of expenses for pile driving includes the following components: diesel hammer rental ($34), crane ($52), leads ($8), labor ($44) and overhead ($100)—totaling approximately $238 per hour of pile driving. The Colerick testing concluded that CMI’s pads drove piles 33% faster than asbestos (more piles per hour), bringing cost down to $157.08 per hour of pile driving. Product Manager, Tom Simpson, feels safer pegging performance advantage at only 20%, which still conservatively accounts for a $190.4 per hour cost, versus the original of $238.
If we also factor in the amount of time it takes to change asbestos sets, it contributes significantly to overall cost. In the Colerick case, 20 sets were needed, and for 20 minutes per set changing time, this adds up to an additional 400 minutes (6.7 hours). The Fazio example was even more extreme, adding an additional 16.7 hours to total job time. We will use an average of 11.7 additional hours per job in our following calculations.
With both Colerick and Fazio, only one set of CMI curled metal pads was needed for the entire job. If we take our initial calculation of $238 per hour of overall pile driving cost, the added time weighs in heavily. Using asbestos pads, an hourly cost of $238 plus an additional 11.7 hours of added downtime for changing pads, adds up to an additional $2,780 per job. Whereas this cost is completely eliminated using the asbestos pads.
Let’s examine total cost for a hypothetical 1,000 foot pile driving contract. At 155 feet per hour (average) using asbestos pads, we’re looking at about 6.45 hours at $238 each -- $1,535. Plus the additional down time to change pad sets (15 piles per set), that comes to 66.66 changes at 20 minutes each, giving us an additional 22.22 hours of time at $238/hour -- $5,289. Using 66.7 sets at about $45/each also contributes another $3,002. The sum cost for a 1,000 foot contract is about $9,825.
For the same job using CMI curled metal pads, we average 200 feet driven per hour, giving us 5 hours at $190.4/hour -- $952. With 300 driven feet per set, we only use 3.33 sets at an undetermined cost. At 4 minutes per set change (13.3 minutes total) at $190.4/hour, that adds an additional $42 – bringing our lump sum to $994 (not including cost for pads). The difference between the two jobs is $8,831, and with 3.33 sets used, this accounts to a real value of $2,651.95 per set of curled metal pads.
Pricing Point
CMI is now left with a decision on how much value to pass along to the customer. The real value per set of their curled pads is $2651.95, with production cost of about $321 each (at quantity 4500 for Year 1 including tooling expense, see Figure 3). If CMI accepts a 65% profit margin on each set of pads, this puts the price per set to approximately $1500, and still passes on 35% value to customers, which is an attractive enough margin to undergo the hassles of product/process changes for the savings.
There are additional savings not accounted for, like the reduced opportunities for human error and injury (when changing pads). These covert savings have the potential to add up attractively as well.
By passing along 35% value ($816), this is definitely a pricing strategy targeted at garnering market share. As more data on CMI’s metal pads becomes available, it will be possible to more accurately determine the real value to customers. Because this is a new product, it is important for catalyze adoption by making the price and value transfer as attractive as possible. Pad diameter is still a wild card factor. All calculations in this case were made using the 11 ½” diameter pads. However, the article mentioned that larger pads might not have the same structural integrity, which doesn’t add up to equal savings. Later down the road, pricing strategy should be revised to account for different pad sizes and their performance advantages.
Marketing & Target Audience
One strategy that will significantly contribute to the rapid uptake of curled metal pads is to capitalize on CMI’s evolving position as a thought leader in the industry. By solidifying customer’s perceptions that curled metal pads are the new industry standard, CMI will likely experience a boost in sales generated from this buzz. To effectively position CMI as an industry forerunner, the company should look to use the PR leverage of industry trade associations, field experts, and other organized groups who stand to benefit from more efficient pile driving.
For starters, CMI should focus on conducting and releasing more data on the performance metrics of its curled metal pads. From there, it should loan this data, plus free samples, to other experts/groups who insist on doing their own testing. Third party evaluation and approval should win CMI some credibility with skeptics. Once a little bit of buzz has been generated, it is appropriate for CMI to start launching more traditional marketing efforts (tradeshows, direct mailing, print advertising, etc.). Having some third party validation before indulging in traditional marketing activities will greatly enhance consumer acceptance of the product—leading to more efficient marketing spending. The target audience for marketing spending should be focused on engineers, consultants, and pile driver manufacturers. Each of these groups has the jurisdiction to recommend specific performance-enhancing products to direct users. And each group also stands to personally benefit if construction projects get completed quickly, efficiently, and under-budget.
From the sales side of things, CMI’s independent representatives need to be provided with as much sales collateral and data as possible. Supplying them with the right resources will be critical to successful product distribution. Because this is a new product, it will also be necessary to educate the sales force on every aspect of the product, its use, and its effects. CMI should anticipate the questions they’ll be receiving from their consumers and address each of them with the sales force. An educational training seminar would be a great way to for the salespeople to come together and learn about the new curled metal pads.
Conclusion
With the release of a revolutionary product in a long-neglected product category, CMI sits on the edge of having a major success or a major failure. With such a high price compared to the product substitute, thorough customer education is a must. Yet when customers understand the value they’re receiving in exchange for a higher price, they could catapult CMI and curled metal pads into product innovation ubiquity.
Executive Summary
Perceived Value Pricing – strategy for future success
CMI should set the objective of this new business to be the monopoly and to maximize profits. However, the prerequisite for this objective is to get a patent to prevent this product from being copied and imitated. As long as CMI did not get patent for this product, CMI should not sell it as it would invite the entry of competitors because this cushion pad is not a high technology product and easy to be copied. Thus the following pricing strategy will be based on the scenario of getting patent protection.
To price the new product, CMI should apply perceived value pricing method to deliver its value to customers and CMI must make them perceive this value. CMI also needs to apply several marketing-mix programs such as advertising and roles of influencers to communicate and enhance perceived value in customers’ minds. The price calculation is as follow:
Normal a price of an 11 ½ inch asbestos pad is $3. A CMI’s pad lasts longer than asbestos pads 10 times (conservative estimate: p4). Thus speed and efficiency will be the top priority for marketing and pricing this pad. Based on product life, the pad will only have $30 value. However, based on the data from Colerick test, Corelick spent $1000 for asbestos pads; they use 6 CMI’s pads for the same job. So, it took $1000/6 = $166.67 worth of albestos pads to complete the same work by CMI’s pads. From the Fazio test, it took $400 worth of albestos pads. This has not take efficiency into consideration yet. Assuming that the users do care about speed and efficiency, CMI can charge additional price.
From the Colerick test, the job is to drive 50 feet in to the ground using 300 piles. The albestos pads spend 20mins (150ft/hrs: p.3) on driving and 400mins on set changing. The CMI’s pads spend only 15mins (200ft/hrs: p.3) on driving and 4mins on set changing. We do not need to take the hidden costs into consideration because it is not affected by reducing the driving time or pad changing time. So (420–19)min /60min = 6 hrs 41 min time saving. Because the contractors have to spend $100 per hour, Colerick probably save about $668/6 pads =$111.33 on equipment rental, labor and overhead costs for this work by using CMI’s pads. So the worth of CMI’s pad is $166.67+$111.33 = $278.00
CMI should choose the option to purchase the $50000 permanent tooling, because it will reduce cost per unit by $78.94. By this cost saving alone we can get back the money we invested in the tooling in less than 3 months. This will maximize profit in the long run. The total manufacturing cost will be $69.18/pad. The management wants 40%-50% contributing margin after all manufacturing costs, the price will be about $115 ~ $140 to satisfy the management’s profit expectation. Thus CMI’s should price the pads at $149.00, as this price will have 50% saving for the contractors.
Each CMI’s pad can save a huge among of costs for the contractors. If CMI can get the patent then no competitor can enter the market with the same product. CMI can charge the monopoly profit maximized price, but initially they should give promotional discount of 15% during the introductory phase, that is the first 2 purchases to make customers adopt the new pads because the price can look intimidating. (asbestos pad $3, CMI pad $149).
Marketing-mix strategy to launch and explore market share for new cushion pads
First, CMI needs to get the patent of this new product to protect from competitor entry. As CMI’s objectives is to be monopoly, patent is crucial.
Second, CMI needs to develop distribution channels. Direct channels to contractors who own pile hammers as they contributed high quantity and demand (50% of estimated market share). Also by having direct channels, CMI has more control on the education and monitoring of its clients. After that, CMI should sell to wholesalers and hardware stores to cover the small contractor. CMI should not be too concern about the equipment rental because as CMI’s pads gain popularity in the industry, customers will pressure the rental company to use CMI’s pads.
Third, CMI needs to develop promotional and advertising programs to make customers perceive the value of new pads. CMI needs to educate its consumers in terms of health benefits (no asbestos) and safety (no heating problem) and to add the brand quality by advertising in professional journals. CMI also needs to make the function and merit of the new product to be known by customers, especially the value the new product can create the aspect of health concern.
Fourth, CMI needs to establish a network of influencers or increase public relations. To do so, CMI needs to established networks in a new industry to the company and key influencers to endorse its product. The result from Professor McCormack will be of high value to gain endorsement from consulting firm.
Fifth, CMI needs to do market research, estimate the price elasticity of the new pad and the demand function and then adapt the initial price to the profit maximized price.
Conclusion
CMI’s pads definitely will be the market leader in the industry as it is innovative with high efficiency. Getting patent for this pad will ensure the growth profitability of CMI. In this case, perceived value pricing is used as the pad has more to offer than conventional asbestos. In line with this pricing strategy, marketing mix of advertising, education and distribution play a role in ensuring the success of this product.
Figure 1 – Units Needed Monthly to Fulfill Industry Demand at Different Market Shares
Figure 2 – Conservative Production Schedule for First Year (11 ½” Inch Diameter Units Only)
Figure 3 – Total Manufacturing Costs With and Without $50,000 Tooling Expense
11 ½” Inch Diameter Units Only
Calculation Chart to Arrive at these Conclusions:
Figure 4 – Total Cost per Unit (with and without Permanent Tooling Expense)
11 ½” Inch Diameter Units Only
Figure 5 – Contribution Margin by Price per Unit
Calculations (done in Excel):
Sales - Variable Cost = Contribution Margin
(Qty 4500 units * Price) – (4500 * 27.28) = Contribution Margin
Figure 6 – Comparison of Performance: Asbestos vs. Curled Metal
Total Variable Costs (250 Units/Month)
Total Variable Costs (w/ $50,000 Permanent Tooling Expense)
