Case Statement:
An engineer developed a teleport machine that teleports people from Mumbai to London as of now. He is planning to launch the machine in some time which will enable only a one-way trip for passengers. How should he price it?
C: There can be three approaches to pricing- value-based, cost-based, or competitive benchmarking. Is there any competition?
I: Yes, right now the only way businessmen and CXOs travel in the same route is through the air which is available from multiple airlines. But this machine is the first of its kind.
C: I shall proceed with cost-based pricing first. So, what are the upfront investment and variable costs associated with the machine?
I: One-time investment is Rs. 5 crores to be recovered within a period of 3 years. Over this, he wants to recover a variable cost of Rs. 10000 from the customer per trip.
C: Given the data, machine time for travel & return is 10 minutes. Is it okay to assume that the machine would be kept at rest for a few hours per day for maintenance?
I: Yes! The machine needs 4 hours per day for maintenance.
If it stays for rest for 4 hours a day, it is travelling for 20 hours.
Then, number of trips= 20 hours/ 10 min=120
So, no. of customers in the first year= 120 *300 (assuming no. of days in a year operating to be 300)
= Rs. 36000
So, there are some businessmen from India going to London, and there are some who came here to work from other countries and are on their way to London. I am assuming there are 5 business heavy continents (Europe, Asia, N & S America, Africa) who need to travel often. Do we have an idea of the number of people travelling on this route?
I: Going by the assumption made, take the no. of people travelling proportional to the number of business-heavy continents.
C: Okay, the number of one-way travels between any two of these continents are: 5C2=10, and Mumbai to London is one of the 10 options. So, the no. of customers= 36000/10= 3600
Cost base price per customer per year for the 1st 3 years=
Rs. [(5/3) crores + 10000]/3600 = Rs. (1.7*10^7 + 10000)/3600
= about Rs. 15000 per trip
I: Okay.
C: We can keep the Rs. 15000 as the lower price bound. We can now directly look into value based pricing due to lack of competitors. We know that the primary functional benefit for the product is saving time for the customers. In order to compute the value based pricing, we could value the time saved by calculating the estimated salary of the person based on the time saved on average.
I: I like your approach! We can close the case here!
Background Information:
Customers: High profile businessmen
Objective: Primarily to increase profits and later considering the acceptance, earn for the value provided.
Product: Scalable, 5 minutes to travel, 5 minutes to set up
Case recommendations:
It is a new product competitive benchmarking cannot be done but as per value-based pricing, it will depend on the time saved by a passenger from the airplane’s travel time perspective, and the time cost saved of a middle or high-end businessman per day derived from their monthly salaries.
