Curled Metal Inc.

Finding the Perfect Price Brief Description of Company and the Situation Curled Metal Inc. (CMI) specializes in selling metal-based products to various markets. With over $55 million in annual sales (FY 2007, Exhibit A), theyve managed to capture 80% of the automobile industrys market share by developing and selling a highly specialized product, Slip Seal, designed just for auto manufacturers. Theyve seen a recent slip in sales (a loss of nearly 10% from 2006 to 2007, Exhibit 2), and the pressure is on them to diversify their product line and decrease dependence on the auto industry. Theyve recently developed a new product that aims to revolutionize the pile-driving industry. The introduction of the CMI Cushion Pad has the ability to change the entire industry for its consumers; some of its more prominent features include the capabilities to significantly lower labor and equipment costs, decrease the total amount of pads being used (effectively eliminating waste), and reduce environmental safety concerns amongst the workforce due to the non-toxicity of the pads material. CMI has recently conducted two field testings of its Cushion Pads, with incredible results: the new product performed better than expected at both test sites (Kendrick Foundation Company and Corey Construction). Kendrick was so pleased with the Cushion Pads that theyve asked CMI to quote prices. CMI is now faced with identifying the best price for this product. CMI Cushion Pads Pricing Considerations:

In pricing their Cushion Pads, CMI faces a number of challenges that must be analyzed in order to determine the best possible price. The most pressing issue is the uniqueness of this product and CMIs newness to this market; while there is no doubt that this product holds a high value for its customers, a large portion of that value is due to a reduction in labor and equipment costs. Customers may not be willing to pay more for pads without industry backing, guaranteeing this value of the pads. There is also a very low reference point for other purchasers of this product as it relates to competitors products (see Figure 1). The second issue is CMIs desire to increase their sales (with an ideal goal of doubling the $55 million in sales currently with this product alone). This lofty sales goal disallows several pricing strategies to be used (laid out below in the Pricing Analysis: Alternative Solutions portion of this paper). A third point for consideration in the pricing of the Cushion Pads is the corporate management expectation of a 50% contribution margin. Finally, the limited production capabilities of 250 pads/month (with additional units adding $225,000/250 pads in monthly variable costs) create a burden in identifying the best price. CMI Cushion Pads Pricing Analysis (Alternative Solutions) There are a number of different pricing strategies that CMI can take to price the new Cushion Pads. CMI can start with a Cost-Plus Approach, given their newness to this market. The total unit price per pad would be _____, with a break-even price of ______. In both scenarios, its actually wiser to absorb the $150,000 machinery costs (see Figure 2). The second option could be to price the Cushion Pads using a competitor-based strategy. (Figures 2 and 3). The total per pad would be _____. While both of these options satisfy the desired contribution margin of 50%,

neither of these strategies picks up all of the money that is created by the products value. For this reason, the best option is utilizing a value-based pricing strategy. This strategy will satisfy the contribution margin, allow Cushion Pads to pick up all of the value from its product, and revolutionize the pile-driving industry. Recommendation for CMI Cushion Pads Pricing Willingness to Pay: The new Cushion Pad is a desirable product not only because of its ability to reduce the amount of pads used for drilling overall, but because of the value it creates by yielding labor savings. Using the lowest priced 11-inch pad possible ($6.5, used in the first Kendrick testing), there is an estimated cost of $3,000/15,000 feet drilled using the non-CMI pads. The savings for the customer, however, comes from the savings in labor costs. Estimating a total of $714 labor costs/hour (Exhibit A), the approximate labor savings totals $5.08/foot driven (using Sanwals conservative estimates of 292,000,000 feet driven per year, page 5). Comparatively, CMI pads result in only $3.57/foot driven. On a job of 15,000 feet, the difference in value is $22,650 in saved labor costs alone. Consequently, a customer should be willing to pay $5.28/foot driven for the CMI Cushion Pads (see Figure 4). With this value-added, CMI can charge up to $2,837 for one pad, which would make the price exactly as much as the cheapest competitor (including labor costs). With that price, CMI would only have to sell 21,854 pads (which would service approximately 12% of the market, a feasible goal for CMIs entrance) to make $62,000,000.00 (VP Joseph Fernandezs approximate sales goal). The recommended CMI price, however, is $1986.34 (which is the value-capturing price of $2,837 with a 30% reduction). With an estimated 292,000,000-390,000,000 driven feet per year, the pile-driving

industry is large enough for many sellers. CMIs foray into this industry is new, however; in order to develop clientele, CMI should cultivate several segments (namely, the large engineering contractors, consulting engineers, and independent contractors), in addition to a media blitz introducing the product. Going for a skimming strategy is smart, as CMI is currently uncertain of whether competitors may react without a patent. Because the price is so steep, however, offering the Cushion Pads at an immediate discount (while still retaining almost 100% profit margins) would allow CMI to develop customers. Figure 1

CMI Cushion Pads: Cost-Based Approach Anticipated Production Fixed Costs per unit Variable Costs per unit: Material Variable Costs per unit: Labor Total Variable Costs Total Costs Required Contribution Margin Total Price per Unit (Variable Costs/%CM) $ $ $ $ $ $ 3000 units 125.70 46.92 34.92 81.84 207.54 0.5 163.68

Figure 2

CMI Cushion Pads Pricing Analysis Unit Price Anticipated Production Fixed Costs per unit Variable Costs per unit Contribution Margin Unit Contribution Price Total Sales Total Costs Net income $ $ $ $ $ $ $

Option 1: Cost-Plus Approach 163.68 3000 125.70 81.84 50% 81.84 491,040.00 772,620.00 245,520.00

Option 2: Competition-Based Pricing $ 333.33 3000 $ 125.70 $ 81.84 75% $ 251.49 $ 999,990.00 $ 772,620.00 $ 227,370.00

Option 3: Break-even Analysis $ 257.54 3000 $ 125.70 $ 81.84 68% $ 175.70 $ 772,620.00 $ 772,620.00 $ -

Option 4: Value-Based Pricing $ 1,986.34 30710 $ 125.70 $ 893.92 55% $ 1,092.42 $ 61,000,501.40 $ 31,462,553.40 $ 29,537,948.00

Figure 3
CMI Cushion Pads: Competition Based-Pricing Lowest Priced Competitor CMI Cushion Pads Cost of single pad $ 6.25 $ 333.33 Total number of pads in set 24 6 Total number of sets used 20 1 Total feet driven 15000 10000 Total cost of pads $ 3,000.00 $ 2,000.00 5.00 Cost per foot driven $ 5.00 $ $ 333.33 Total Price per Unit !

Costs of Conventional Pads for total industry Kendrick Job ($6.25) $

$ $ $

Price per pad Total number of piles Number of feet driven into ground per pile Total number of feet driven into ground Piles driven per set of pads Total sets of pads used Number of pads per set Total pads used for specific job Foot per pad Price per foot driven Total pads used per year (292 million) Total cost of pads (low) Total pads used per year (390 million) Total cost of pads (high)

6.25 300 50 15000 15 20 24 480 31.25 0.20 9344000 58,400,000.00 12480000 78,000,000.00

Kendrick Job ($9/pad) $ 9.00 300 50 15000 15 20 24 480 31.25 $ 0.29 9344000 $ 84,096,000.00 12480000 $ 112,320,000.00

Corey Job ($6.25/pad) Corey Job ($9/pad) Corey Job ($10/pad) $ 6.25 $ 9.00 $ 10.00 300 300 300 40 40 40 12000 12000 12000 6 6 6 50 50 50 12 12 12 600 600 600 20 20 20 $ 0.31 $ 0.45 $ 0.50 14600000 14600000 14600000 $ 91,250,000.00 $ 131,400,000.00 $ 146,000,000.00 19500000 19500000 19500000 $ 121,875,000.00 $ 175,500,000.00 $ 195,000,000.00

CMI Pads (Kendrick Costs) Pads (Corey Costs) CMI Pads Conservative Estimate CMI $ 4,260.40 $ 5,712.48 $ 2,837.62 300 300 50 40 15000 12000 10000 300 300 1 1 1 6 5 6 6 5 6 2500 2400 1666.666667 $ 1.70 $ 2.38 $ 1.70 116800 121666.6667 175200 $ 497,614,720.00 $ 695,018,400.00 $ 497,151,413.33 156000 162500 234000 $ 664,622,400.00 $ 928,278,000.00 $ 664,003,600.00

Labor costs associated with conventional pads Total number of piles Feet driven per hour Piles driven per set of pads Total number of feet driven into ground Number of pads per set Number of set changes Time required for change per set (in minutes) Total time of changes (in minutes) Total number of hours driving piles (low: 292 million feet) Total number of hours changing sets (low: 292 million feet) Total labor hours (low: 292 million feet, Driving piles and changing sets) Total number of hours driving piles (high: 390 million feet) Total number of hours changing sets (high: 390 million feet) Total labor hours (high: 390 million feet, Driving piles and changing sets) 300 150 15 15000 24 20 20 400 1946666.667 129777.7778 2076444.444 2600000 173333.3333 2773333.333 300 150 15 15000 24 20 20 400 1946666.667 129777.7778 2076444.444 2600000 173333.3333 2773333.333 300 160 6 12000 12 50 20 1000 1825000 405555.5556 2230555.556 2437500 541666.6667 2979166.667 300 160 6 12000 12 50 20 1000 1825000 405555.5556 2230555.556 2437500 541666.6667 2979166.667 300 160 6 12000 12 50 20 1000 1825000 405555.5556 2230555.556 2437500 541666.6667 2979166.667

300 200 300 15000 1 1 4 4 1460000 1297.777778 1461297.778 1950000 1733.333333 1951733.333

300 200 300 12000 1 1 4 4 1460000 1622.222222 1461622.222 1950000 2166.666667 1952166.667

300 200 300 10000 1 1 4 4 1460000 1946.666667 1461946.667 1950000 2600 1952600

Average Equipment and Labor Cost per Real Hour Diesel Hammer rental Crane rental Leads Laborers and Overhead Total Labor Costs per Hour $ $ $ $ $ $ $ $ $ $ $ $ $ $ 5.08 $ 0.20 5.08 5.28 1,540,981,333.33 164.92 2,058,160,000.00 $ $ $ $ $ $ 1,482,581,333.33 $ 1,980,160,000.00 $ 1,482,581,333.33 1,980,160,000.00 5.08 0.29 5.08 5.37 1,566,677,333.33 167.67 2,092,480,000.00 102.00 156.00 24.00 432.00 714.00 $ $ $ $ $ 102.00 156.00 24.00 432.00 714.00 $ $ $ $ $ $ $ $ $ $ $ $ $ $

102.00 156.00 24.00 432.00 714.00

$ $ $ $ $

102.00 156.00 24.00 432.00 714.00

$ $ $ $ $

102.00 156.00 24.00 432.00 714.00 1,592,616,666.67 $ 1,592,616,666.67 $ 1,592,616,666.67 2,127,125,000.00 $ 2,127,125,000.00 $ 2,127,125,000.00 5.45 $ 0.31 5.45 5.77 1,683,866,666.67 115.33 2,249,000,000.00 5.45 $ 5.45 $ 0.45 $ 0.50 $ 5.45 $ 5.45 $ 5.90 $ 5.95 $ 1,724,016,666.67 $ 1,738,616,666.67 $ 118.08 $ 119.08 $ 2,302,625,000.00 $ 2,322,125,000.00

$ $ $ $ $ $ $ $ $ $ $ $ $ $

102.00 156.00 24.00 432.00 714.00

$ $ $ $ $ 1,043,366,613.33 $ 1,393,537,600.00 $ 3.57 $ 1.70 3.57 5.28 1,540,981,333.33 13,193.33 2,058,160,000.00 $ $ $ $ $ $

102.00 156.00 24.00 432.00 714.00

$ $ $ $ $ 1,043,598,266.67 $ 1,393,847,000.00 $ 3.57 $ 2.38 3.57 5.95 1,738,616,666.67 14,290.00 2,322,125,000.00 $ $ $ $ $ $

102.00 156.00 24.00 432.00 714.00 1,043,829,920.00 1,394,156,400.00 3.57 1.70 3.57 5.28 1,540,981,333.33 8,795.56 2,058,160,000.00

Annual Labor Costs (Low: 292 million feet, Total Hours*Costs per Hour) Annual Labor Costs (High: 390 million feet, Total Hours*Costs per Hour)

Labor Costs per foot

Total Pad Cost per Foot Driven Total Labor Cost per Foot Driven Total Price for Pad and Labor per Foot Driven Total Expenditures on Pads and Labor for the year (low: 292 million feet) Total price per pad Total Expenditures on Pads and Labor for the year (high: 390 million feet)


CMI Cushion Pads Unit Costs Total units Variable Cost per unit: Material Variable Cost per Unit: Labor Additional variable costs ($225,000/250 units after 3,000 units) Total Variable Cost per unit Total Variable Costs Total Variable Costs for all units Total Units $ $ $ $ $ 3000 46.92 86.40 n/a 133.32 399,960.00 29,033,067.37 $ $ $ $ $ 27710 46.92 86.40 900.00 1,033.32 28,633,107.37 30710