Polyethylene Resin

Our client is a large chemical manufacturer. Recently our client has developed a proprietary polyethylene resin to be used in the manufacturing of flexible irrigation pipes, which in turn are typically used by large commercial farming companies to irrigate their fields. Our client is trying to decide how to price this resin and has requested our assistance. How would you recommend they price this product?

Our client is a large chemical manufacturer. Recently our client has developed a proprietary polyethylene resin to be used in the manufacturing of flexible irrigation pipes, which in turn are typically used by large commercial farming companies to irrigate their fields. Our client is trying to decide how to price this resin and has requested our assistance. How would you recommend they price this product?

Our firm typically recommends a value-based pricing methods, rather than cost-plus. This means we examine the value the product creates for the customer, rather than just applying an expected margin to COGS. A value-based pricing method can be thought of as the sum of: 1. Reference Value – what the next best substitute costs 2. Differentiation Value – what incremental value our product adds above the substitute Value for Farmers: $0.40 + $2.00 + $1.20 = $3.60 per 100ft <<< what incremental price Extruders can charge with client’s resin To Convert to Price for Extruders: 20lbs of resin required to make 100ft of pipe $3.60 value per 100ft / 20lbs of resin required = $0.18 incremental value per pound. Therefore, client can charge up to $0.18 above cost of substitute resin, or up to $0.46 Our client can charge up to $0.46 per pound for this resin. When approaching the pipe extruders with this new product, our client must frame the discussion around the incremental value this resin creates for the extruders ($0.18 per pound). One approach would be to split this incremental value 50/50, resulting in a price to the extruders of $0.37. This is a strongly qualitative case that requires candidates to apply the concept of value-based pricing across a distribution channel. Average candidates will realize our client can charge up to, but not equal to the value our resin creates for the pipe distributors. Strong candidates will include a price recommendation as well as other elements of the marketing mix (promotion, place) appropriate for a premium product.