Cumberland Metal Industries (CMI) developed the curled metal pads for pile-driving. This new product shows high potential in terms of sales for CMI. An offer was placed to buy the newly-produced curled metal pads and CMI must come up with the right price. In this case study, students are allowed the opportunity to look into the factors that must be considered in arriving at a pricing decision.
Jeffrey J. Sherman
Harvard Business Review (580104-PDF-ENG)
January 01, 1980
Case questions answered:
We have uploaded four case solutions, which all answer the following set of questions:
- What is the cost-oriented price for the Cumberland Metal Industries pads? Please calculate CMI’s costs and use appropriate margin assumptions to derive cost-based price alternatives.
- What is the value-oriented price for CMI pads? Please use the Colerick and Fazio tests to calculate the “value” to buyers of CMI pads.
- What price would you recommend overall? What other issues should you be looking at to determine the price? (other than 1. and 2. above)
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Cumberland Metal Industries: Engineered Products Division--1980 Case Answers
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Cumberland Metal Industries (CMI) produces curled metal products. They developed a new product, the curled metal pad for pile-driving, which shows a lot of sales potential for the company.
The Colerick Foundation Company, who tested their product, was really impressed with the results they had and is asking to buy CMI’s curled metal pads. They need to give them a quote for a price by Friday, so a decision on their pricing strategy must be made before then.
This is a decision case because the problem is clear: the pricing, as well as the promotion of the new product, all that is needed is for a decision to be made on how to go about that.
Company – Cumberland Metal Industries (CMI)
Cumberland Metal Industries is one of the largest curled metal companies in the US, with sales of $18.5 million in 1979. The company originally started by fabricating components for chemical process filtration and got a big boost with the introduction of exhaust gas recirculation valves in US cars.
They developed and sold a product under the trademark Slip-Seal and gained an 80% market share in the industry. However, management wanted to diversify away from their reliance on this industry in the long term, so when this new application of curled metal technology was brought to their attention, they were keen on examining it.
Initial tests with consumers (Colerick) revealed that consumers are very eager for CMI’s product. The asbestos cushion pads currently used were seen as just a necessity of the job and not a branded product providing benefits to the consumer. Also, the consumer is becoming increasingly wary of the detrimental health effects of asbestos, so employees were pleased to hear about a new asbestos-free product.
Since in a pile driving industry, there were no companies that really specialized in pad-making, initially, at least, there will be no competition for Cumberland Metal Industries. The pads that were used at the time were asbestos pads without a brand name and were not given much thought or attention.
Asbestos pads were comparatively very inefficient to use in the workplace and posed health risks to the workers on site exposed to them. They sold for $2-$3 each, but a set could cost $40-$50.
Asbestos pads would heat up drastically when used, making handling them very difficult after switching sets. Time would be wasted when waiting for them to cool down, and they would need to be switched far more often than the curled metal ones.
SWOT – Cumberland Metal Industries
Using CMI’s market size estimates, at a rate of 290-390 million feet of piles driven annually, they will not be able to meet market demand on their own. Using their estimate of each set being able to drive 10,000 feet of piles, they would need to produce 29-39 thousand sets annually, or 14,500-19,500 pads monthly, which is 580%-780% more than what they currently have the capacity for.
Therefore, in the near future, they will not be able to monopolize the pile-driving pad industry completely without a drastic increase in production capacity, and some pile drivers will continue to use asbestos pads unless another curled metal products company decides to enter the market as well due to the absence of a patent on their product.
The product in question, in this case, is Cumberland Metal Industries’ curled metal pads for driving piles into the ground. The pads are there to protect the piles from damage by the hammer, and CMI developed a pad from their curled metal that is much more durable and more efficient than anything that was used at that point in the industry.
The distribution of cushion pads was very ambiguous. Hammer sales and rental outlets, heavy construction supply houses, pile manufacturers, and an assortment of other outlets carried them as a service. None of the distributors sold them as a work-saving tool, only as a necessity.
The curled metal pads are starting fresh in terms of promotion because there are no precedents for this product. There are a number of market influencers that could be used to promote Cumberland Metal Industries cushion pads, including architectural/consulting engineers, soil consultants, pile hammer distributing and renting companies, engineering/construction contractors, and independent pile-driving contractors.
Also, construction magazines and professional seminars such as “Piletalk” could be used to bring visibility to their product, as well as the endorsement of a recognized professional in the industry, Professor R. Stephen McCormack.
Curled metal pads are a completely new product, and Cumberland Metal Industries has no competition in the industry. Therefore, they must determine a pricing strategy from scratch. A company may choose to price its products using one of three lenses: the consumer, the competition, or the company.
In the case of CMI, looking through the competitive lens would not work because there is none, so that option can be rejected without further analysis. This leaves the company and the consumer, more specifically, the cost-plus or value-added pricing strategies, respectively.
This pricing strategy is dependent on the company’s costs to make the product and then adding a percentage for the margin on top of that. In the pile driving industry, it is typical for distributors selling pads to take a 30-40% margin, and Cumberland Metal Industries’ corporate expects a…
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MBA student, Boston