EVC-based Pricing: Novel Motor Oils

Calculating EVC

1. Calculate the total cost associated with using the current product

2. Calculate the total cost associated with using the new product

3. Figure out the price which will make a customer indifferent between using the current product

and using the new product

Case

A new motor oil “Novel” will be introduced with two benefits: (1) it only needs to be changed once a

year regardless of the mileage, and (2) it reduces the chance of eroding the oil tank.

Current motor oils need to be changed every 6,000 miles. Every oil change costs five liters of oil. The

current motor oil costs $1 per liter. The labor cost for oil change is $20.

The number of liters required and the labor cost for the new motel oil are the same.

The new oil also reduces the chance of eroding the oil tank from 6% to 2% a year. When the oil tank is

eroded, a new oil tank is needed and it costs $50 (assume that the replaced tank will not be eroded

again).

Question

What is the EVC-based maximum price of the new Novel Motor Oil per liter to a car driver who drives

18,000 miles per year?

ANSWER KEY

(1) Identify cost components: Oil change (oil + labor) + Oil tank

(2) Cost of using the current motor oil a year

= (Cost of Oil Change * # Oil Changes per year) + Cost of Oil Tank per year

= (($1 per liter * 5 liters) of oil + $20 labor) per oil change * (18,000 miles/6,000 miles per oil change)

+ $50 per oil tank * 6% chance erosion

= $78 total cost for current motor oil per year

(3) Cost of using the new motor oil year

= (Cost of Oil Change * # Oil Changes per year) + Cost of Oil Tank per year

= (($X per liter * 5 liters) of oil + $20 labor) per oil change * 1 oil change per year

+ $50 per oil tank * 2% chance erosion

= ($5X + $20) + $50 * 2%

= $5X + $20 + $1

= $5X + $21 total cost for new motor oil per year

(4) X is the price of the new motor oil per liter based on EVC the point at which the two costs are

equivalent

$5X + $21 = $78

X = $11.40 per liter