Teaching Notes: Pricing Russian Technology
Let the students describe the process of coming up with economic value. They will identify that
economic value depends on what it costs a pipeline company to repair a surge. Ask them, “What
Cost of a Surge (minor)
Labor
$ 9,000
outages occur during months when demand is high (hot and cost months).
Total Cost of a Minor Surge: $95,000
Frequency of minor surge per compressor 0.4 per year
Expected Annual Cost of a Minor Surge: (0.4) x $95K = $38,000
Cost of a Surge (major)
Labor
$ 24,000
Lost production (24 hr to restart)
$240,000
Frequency of minor surge per compressor = 0.004 per year
Expected Annual Cost of a Minor Surge: (0.004) x $455K = $1,820
Revenue sources of value?
Customers of pipelines may be willing to pay more for more reliable delivery
Competitive product lasts four years. Ours is unspecified; expect longer due to non-mechanical,
but assume four years. Then over life of product, ours is worth: $66,818
Economic value per controller: 4 yr. present discounted value
1
of $17,919 = $56,818 plus the
$10,000 cost of a mechanical device.
Communication of value:
Assume these numbers are correct. We go into purchasing agent and offer our superior product,
which replaces the product for which he’s been paying $10,000 each, for a real bargain price. We
Why not?
• Difficult comparison (purchasing agent does not yet see the value)
So what do you do?
Some turkeys will suggest that we therefore have to charge a more fair price. Ask them what is
fair. Since they now have a high reference, they will say something like $30K rather than $50K.
How do we overcome these problems? (Students will have lots of good ideas)
• Free sample on just five of his 100 compressors for 1 year. Demonstate value