Robert Gerstenberger RE:Pricing JD-750 Our Company is now entering the heavy industrial market with the new construction tractor JD-750 a heavy bulldozer with 110 horse power and a fully automatic dual-path hydrostatic drive. These features are truly unique for our company since it is significantly larger than our previous product line. JD-750 should be priced right at Caterpillars D-5 and not higher based on the unique features of our product and I recommend pricing JD-750 at $64082. 0 (Table A). The price suggested will meet our objective of maximizing profits in the first few years of the launch before our competitors enter the market. JD-750 is a niche product with technological innovation and will attract heavy construction users. Moreover there is a market of 5500 units per year in which we can tap in to and with the current price recommendation it can profit us about 8% more than recommendation that has been made.
Our company has the largest market share in the light crawler tractors, and our market share mostly came from domestic market. Our distribution channel is also second only to Caterpillar who dominates the market for heavy equipments in construction industry and will be our biggest competitor in this market. Our light crawlers, JD350 and JD450, were very successful products. Introducing JD-750 will help our company gain market share in farming contractors that have started using these product lines for non agricultural area.
Since our customer already know us and our successful reputation as reliable, innovative and engineering excellence, we can leverage our reputation and engineering work, especially JD-750 to the market at a profitable price point. We should stay away from direct competition from Caterpillar who dominates the market in order to penetrate the new market with our JD-750 product line. JD-750 needs to be priced a little higher than those of the competition because our design is more fixed than price and also it is more productive because of its fully automatic feature that no one currently offers.
Price can be re-evaluated over time period. Our focus should be to offer reliable and innovative products at a slightly higher cost to our market. Our biggest threat is Caterpillar who can start using the hydrostatic transmission since it is not limited to selling only to our company; there is low or no patent protection from our suppliers on this product. Caterpillar can also lower their price to compete. Our customers perceive value in our company so we should try to price it at orienting point on 3C’s pricing model (Table B).
The suggested price of $59,785. 00 according to me is at lower end and I believe we are not utilizing our potential in JD-750 product. With 10-15% increased productivity to our customers from current products such as D5 from caterpillar which has failed to attract many consumers, we are giving up our profit margins with such a unique product. The suggested price is at 95% from current D5 price if compared with $/horse power. We can price it parallel to D5 and we have an added advantage of our products value and productivity.
Certainly the higher price can be perceived costly by our customers and it may hurt our other product lines revenue stream but once JD-750 product is utilized the value will be seen and thus increase our sales, revenue and profit margins for all of our products, since we then will be known as innovator and not follower. We are the frontrunner in JD-750 with Hydrostatic transmission and fully automatic and I believe we should price it higher at first $64,082. 00 and then once our competitor launches similar products then re-evaluate our price and compete with them to gain more market share.
This price can easily be achieved by our company if our customers realize that JD-750 is 10-15% more productive and is a huge saving for their company. TABLE A| | | | | | | | | | PRODUCT| JD 450-C| CAT D-3| JD-750| CAT D-5| | | | | | Suggested or Historical Price| $29,926| $30,146| $59,785| $61,117| | | | | | Horse Power| $65| $62| $110| $105| | | | | | Price/Horsepower| $460| $486| $544| $582| | | | | | DEERE & COMPANY (Price to competitor)| 94. 65%| | 93. 47%| | | | | | | | | | | | Recommended Price against Competitor| JD-750| CAT D-5| | | | | | | | 00% Pricing per horse power| $582| $582| | | | | | | | Net Horse Power| $110| $105| | | | | | | | Total | $64,020| $61,110| | | | | | | | | | | | | Cost Price Ratio and Profit Margin JD-750| My Suggestion| Case Suggestion| | | | | | | | List Price| $64,020 | 59785| | | Discount volume discount (20%+4. 5%)| $15,684. 9 | 14647| | | Net Price| $48,335. 10 | 45138| | | | | | | | Cost| $36,110. 00| $36,110. 00| | | Net Profit| 33. 85%| 25. 00%| | | Cost/Price Ratio| 74. 71%| 80. 00%| | | | | | | | Dealer discount 20% and volume discount 4. 5%| | | | Net Price is list price minus 24. % dealer discount| | | | Costs are factory standard costs| | | | | Cost/price ration is cost divided by net price| | | | Net profit is net price minus cost divided by cost | | | | | | | | | Table B (Three C’s Model of Pricing JD-750| | | HIGH Price| 110% at current Caterpillar D-5| | No Possible Demand at this price| $67,228. 70| | | | | Ceiling Price| 100% at current Caterpillar D-5| Competitors price of substitutes| Customers assessment of unique product | $64,020. 00| Orienting Point| | | | Floor Price| 90% at current Caterpillar D-5| | Low price no possible profit at this price| $55,005. 30| | | | |