Q1. The growth in the infrastructure spending has created demand for jackhammers that are used to drill through concrete pavements and other hard surfaces. The device consists of a compressed air motor that is connected to a rotating drill that is jabbed into the hard surface to break it up.
The motors are made by a large number of small manufacturers and the drills are made by very small forge shops and are sold through independent rental companies that rent construction equipment. Each drill is sold by the rental companies to drilling contractors for about $ 60, and lasts about 25 hours, and is then discarded. The cost of a drill to the rental company is $ 25. These companies own the motors and rent them to contractors at $50 per day.
Construction companies that execute infrastructure projects contract out drilling jobs to contractors at a fixed drilling project price that currently translates into about $22 per hour. Upon receiving the contract, the contractors put together a drilling crew that costs about $10 per hour per person for an 8 hour day. One drill is run by one person.
MForge is a medium size company that has developed an innovative jackhammer drill that can be attached to a conventional compressed air motor but lasts for around 100 hours of use. It also speeds up the drilling process by about 25%. The novel spinning motion of the drill also reduces dust by about 50-75% depending on the application. MForge's cost of making this drill is about $9 and the company can meet current demand without capacity expansion. The company is currently trying to figure out the most appropriate price and marketing plan for the product.
How should MForge decide upon its price? What price would you recommend to them for launching the product? Why? How would the price depend on the other elements of the marketing mix? (Please state all your assumptions clearly)