Curled Metal Inc.

Introduction

Curled Metal Inc. (CMI) is about to introduce a new product that may have a significant impact to the company. Joseph Fernandez, CMI’s VP, and Rajiv Sanwal, group manager of the mechanical products group, is reviewing different pricing methods and channel marketing for their new curled metal cushion pads. As the case highlights, CMI’s pads have several differentiators that puts them at an advantage over their competitors. Fernandez and Sanwal know that currently cushion pads are being seen as a necessary accessory rather than something that might benefit the industry of pile driving. CMI knows that if their pads are introduced correctly, sales might double and compensate for the decline other existing products.

Influencers

In order to sustain, CMI needs to introduce a successful product to increase revenue and profits. There is a list of possible influencers towards purchasing the pads. In the pile driving industry there is a list of entities that participate in the distribution of what CMI is about to introduce. CMI was able to spot the following: pile hammer manufacturers, architectural or consulting engineers, soil consultants, pile hammer distributing and renting companies, engineering and construction contractors, and independent pile driving contractors. A full description of the entities mentions above is explained in Exhibit 1.

Issues

CMI needs to find a way to price the new product and find channels of distributions and marketing strategies in order to succeed. Because of these metal pads being a new product for CMI, there needs to be a plan for pricing, strategic ideas, and marketing communications to take the product to success.

CMI Pads Pricing

According to corporate management, CMI would like to see a contribution margin of 40-50% of the selling price after manufacturing costs. CMI pads are a new product that are not only innovative, but also unique to the market. This allows CMI to be a leader in high-quality pads as well as independent from competitors in its pricing methods. In the first year of production, it would be wise for CMI to begin at 50% margin to give itself room to adjust margins as cost of production is lowered with increased economies of scale. Higher margins translating to higher end prices to distributors and end-users also sets CMI apart as a premium, high-quality product compared to current products available in the market.

In terms of pricing method, CMI has two options for CMI pads:

Alternative 1: Cost-Plus

The first pricing method CMI can use to push out the company’s innovative new product is to price using the cost-plus method and is the simplest way of determining how to price CMI pads to distributors. As shown in Exhibit 6, there are two sets of projected costs for manufacturing that are dependent on whether or not CMI plans on investing in permanent tooling. This means that, depending on CMI’s manufacturing plans, the price per pad or set of pads will differ.

If CMI utilizes existing equipment (therefore not investing an additional $150,000 into production), the total manufacturing cost is $444.36 per pad.With a contribution margin of 50%, the price per pad will be approximately $890 and the price per set will be approximately $5334. If CMI decides to purchase permanent tooling, there is an additional up-front cost of $150,000 alongside the total manufacturing cost per pad of $207.54. In such a case, the price per pad and per set with 50% contribution margin will be approximately $415 and $2490, respectively.

Cost-plus pricing, as mentioned earlier, is the easiest way for CMI to determine what price to set the pads at for introduction into the market. This method takes into account the target margins that corporate prefer, and may allow CMI to penetrate the market and drive volume sales by having lower prices compared to pricing with other methods that take into consideration external factors. While it is a logical and easily defendable method of pricing, by using cost-plus CMI will leave money on the table by not considering what other ways CMI pads add value for customers. Pricing lower also sets a precendence for future CMI pads line extensions or changes by creating a standard price at either $2490 or $5334 per set in the customer’s mind. This may hurt future needs to change CMI pads pricing or create obstacles for pricing new products later on. Additionally, CMI’s breakeven units will be higher by pricing lower. Despite potentially higher market penetration, CMI lacks branding with its pads and faces the task of educating consumers on a new product, which may make hitting breakeven units for CMI more difficult.

Alternative 2: Value-Added

The second price alternative that CMI can pursue is the value added approach where they take into account the additional value gained by consumers (e.g. reduced labor costs, raw material savings, and energy savings). The pricing alternative has the ability to capture hidden margins that alternative 1 does not factor in. The additional value received by the end consumer justifies the higher cost that they are paying.

If CMI decides to choose the second price alternative than they would be able to take into account an additional savings of 34 hours for the consumer. This is based on an average savings of 12 hours (average of 396 and 996 minutes) in addition to the average 22 hours saved from feet driven/ hour while pile driver at work. CMI’s product has a total savings of $4488 (based in labor cost per of $132) for the end consumers. The total buyer value for their product is $9822 a set ($5334 plus $4488 from value added) and $1637/pad. This option is very lucrative for CMI because it allows them to capitalize on the additional savings that their product offers to consumers.

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An Attractive Opportunity For CMI

Market Size

Based on calculations and numbers given previously we can estimate that the market size of the pile driving industry ranges from 29,000 to 39,000 sets per year. This is based on a set a curled metal pads driving 10,000 feet with an average of 290 to 390 million feet of piles driven annually. The US market for cushion pads is 234,000 pads per year and $2,106,000 in revenue with an average price of $9 per pad. This