Case Statement:
Your client manufactures and sells toothbrushes in USA. Their R&D team has developed a new toothbrush with the following characteristics-
1.It has special bristles that won’t lose shape
2.It is made from an unbreakable plastic
3.It has a protective covering that protects it from germs
How should they price it?
C: I would like to know what do these characteristics exactly entail?
I: The toothbrush will last forever, basically it will be the last toothbrush you ever buy.
C: How much investment has already been made and should it be included while pricing it?
I: No, not required.
C: Is the technology scalable?
I: Yes.
C: There can be three approaches to pricing-value based, cost based or competitive benchmarking. Differential pricing can also be looked at later.
I: Which one will you do here?
C: I think value-based pricing makes sense here. Cost based cannot be done as value of initial investment is not known and since it is a new product competitive benchmarking can’t be done either.
What is the price of the current toothbrush sold? I think it would be around $3-4.
I: Correct, about $4.
C: So now I’ll look at the number of toothbrushes used over a customer’s lifetime and the cost associated with it. The average age of a US citizen is 25-30 years so they will live for another 50 years and assuming they replace their toothbrush once every year-
Price of new toothbrush= 4*50 = $200
But I believe nobody will pay this much for a toothbrush because people don’t keep a toothbrush for so long and people own multiple toothbrushes for different purposes like travel etc. So, the price of this toothbrush should be lower.
I: Good point. Assume the price is $120. What will be the market size and revenue?
C: The population of USA is 320 Mn and since most people use a toothbrush and the standard of living in general is high, I think the market size would be 320 Mn.
Revenue= 320*120 = $38.4 Bn
I: Suppose now that another firm wants to buy this product for $38.41 Bn. Give reasons why this is not a good bargain?
C: More revenue can be generated in the following ways-
•This product has great scope for generating more revenues by expansion. Since the US market will eventually get saturated, other geographies can be tapped into.
•This technology can be used to make other products since you mentioned that it is scalable.
•Another consideration is time value of money.
•Some people might buy this toothbrush again, especially if new variants are released.
