Eastman - Tritan

Executive Summary

• Eastman should adopt the EVC model because it reflects the value added to the final consumer. Following a cost plus pricing model severely undercuts the actual value of the Tritan product.

Pricing Schemes.

Cost plus pricing is a cost-based method for setting the prices of goods where you take the unit production cost and add to it a markup percentage in order to derive the price of the product. Since the production cost for the co-polyester was already high and it was a relatively new product, it makes sense for Eastman to adopt a cost plus model to convince MegaTec to buy their product while Eastman makes a profit at the same time.

Value based pricing is the setting of the product’s price based on the benefits it provides to consumers. Since the copolyester is substantially superior to the polycarbonate it replaces and adds huge value to both the consumers and MegaTec, it makes sense for Eastman to adopt a value-based pricing model.

Cost-Plus Pricing

Cost plus pricing scheme has been clearly described in Table 1. The final cost per pitcher is $12.

The advantage of this pricing scheme is that it is very simple and if the mark-up percentage is applied consistently across product ranges, then Eastman can also predict more reliably what the overall profit margin will be.

The two main disadvantages of this scheme is that

(1) Customers don’t care about the company costs; they care about the product attributes they value.

(2) Unrealized revenue and profit can be substantial: If the perceived value by consumers is not understood by Eastman, then they may leave a lot of money on the table.

Value-Based Pricing (this will be most of your writeup)

EVC = Reference value + positive differentiation value – negative differentiation value

Reference value = $Cost of first pitcher = $7.532 (as calculated below)

Positive differentiation value: (1) 2 polycarbonate pitchers will not have to be replaced – Megatec sells them them at cost. Cost of pitcher = (5.5 + Raw material cost)

Raw material cost includes cost of polycarbonate, profit margin charged by Eastman for polycarbonate and cost of transport = 1.053 * (0.75+1+0.18) = 2.032

Cost of pitcher = 5.5 + 2.032 = 7.532. Cost of 2 pitchers = 7.532*2 = $15.064

(2) Additional premium charged by Megatec for premium pitcher - $15

Negative differentiation value: Cost of 1 copolyester pitcher. Only one is being considered because of long life of