Pricing Russian Technology
Naum Staroselsky emigrated to the U.S. in 1974 from the then Soviet Union after 16 years as a Soviet expert on turbine controls. Staroselsky's specialty is the technology of gas compressors--big-ticket, industrial strength machinery used to pressurize and move gases though gas pipelines and within refineries and steel mills.
Fortunately for Mr. Staroselsky, compressors are finicky. Any number of conditions --a change in gas mix, a fluctuation in power, a change in temperature--can result in "compressor surge." In milliseconds, the flow of gas can reverse itself. At minimum, the surge will bring a gas pipeline to a screeching halt, requiring hours to restart. Worst case, the surge will mangle a compressor so badly that it takes days to replace at a cost that can reach six figures.
Naum Staroselsky realized that what goes on in the guts of a compressor can be mathematically modeled. It's all physics. The variables are many, and the interactions complex, but ultimately the conditions leading to a surge can be described by a handful of equations. That was an important discovery. Soon after Staroselky arrived in the U.S., he started Compressor Controls Corp. in Des Moines, Iowa. By 1978, Staroselsky and his fellow Russian colleagues had perfected their first surge-controlling machine. Initially, their mathematically-controlled version was little better than the mechanically-controlled versions that eliminate only about half of all surges on a pipeline and cost approximately $10,000 each. As they gained experience, however, they kept upgrading the software and hardware. Their current version eliminates 95% of naturally-occurring surges (making it 90% more effective than mechanical devices). Customers who have tried the product report being very satisfied with everything but the price.
The cost of making each surge-controlling machine is minimal. The machine consists of off-the-shelf temperature and pressure sensors, a British-made microprocessor, and a tiny chunk of software that fits into a mere 25 kilobytes of memory--less than you would find in a hand-held electronic organizer. Consequently, the manufacturing cost of the Compressor Control's equipment is no more than $1000. No one else can manufacture it, however, since no one else knows the equations that enable it to work so effectively.
How would you determine the value of this product and what price do you think Compressor Controls should charge for this product?