Pricing and Allocation Strategy for Tablet Development Corporation Products - Research Paper Example

? Phase 3: New Strategy Proposal using CVP Calculator for Tablet Development Corporation Product X5, X6 and X7 during period Table of Contents 1 Introduction 2 Analysis of Pricing and R&D Allocation Strategy Used in Phase 2 3 Determining New Strategy for Core Products of Tablet Development Corporation 4 Conclusion References Annexes 1 Introduction Tablet Development is focused on providing high quality and custom designed applications for tablets manufacturers and operating system providers. Its core products are X5, X6 and X7 that have been in the market for the last 2 years. However, there are major drawbacks in the existing price and R&D budget allocation strategies that have undermined the new product development cycle in the organization. In order to bring a revolution in the existing business practices of the company, it is important that a new pricing strategy is devised that is based on the strategic objectives of each product individually. Furthermore, the decisions for the allocation of funds for the Research & Development (R&D) of each product should be taken individually and on annual basis to achieve the desired objectives of the product and the company. However, my strategic decision making for each year has resulted into 60% profitability in case of product X5 and 50% profitability in case of product X6. Furthermore, the increased spending on maintenance, support, enhancement and discovery for product X5 and X6 showed improved product which resulted in higher customer satisfaction. Furthermore, the discontinuation of product X7 through the four years helped in the success of the first two products. Nonetheless, a new strategy needs to be determined using contemporary strategy determining tools like Cost-Volume-Profit (CVP) analysis. 1.1 Aim The aim of this report is to discuss the new pricing and R&D allocation strategy for the core products X5, X6 and X7 using CVP analysis and calculator. 1.2 Objectives To analyse the subsequent performance and life cycles of each product due to the difference in the decisions. To determine the new pricing decisions and R&D budget allocation strategy for each core product, namely: X5, X6 and X7 taken in 4 years (i.e. from 2012-2015). To provide rationale of the proposed strategy with theoretical support. 2 Analysis of Pricing and R&D Allocation Strategy Used in Phase 2 2.1 Penetration Pricing Strategy In order to enter into the established marketplace, Tablet Development Corp. has to undertake the penetration pricing strategy. A penetration pricing strategy is used when the company has to enter into an established marketplace and to attract the market in a substantial manner through low-pricing techniques. In the year 2012, the price of product X5 was set at the lowest possible price of $180 and it was increased by $5 every year. Similarly, the price of X6 was set at $300 only and was increased by $10 each year. The product X7 was discontinued in four years. 2.2 R&D Budget Allocation Strategy Strategic distribution of the R&D budget over the years is key to the success. Therefore, only first two R&D activities require substantial investments whereas the last two requires little investment to keep it going. The R&D budget allocation was increased for product X5 and X6 in the subsequent years whereas, product X7 was allocated less percentage of the R&D budget. The less amount shows the R&D allocations for the maintenance of product X7. 3 Determining New Strategy for Core Products of Tablet Development Corporation Apple Inc. and Microsoft have been involved in developing new products on a regular basis. In this wake they incurred fixed costs related to R&D expenditures and other costs of new product development. In order to remain competitive in the global marketplace, they adopted a new method to determine the prices and R&D allocations for multiple products on a unit cost basis (Morse, 2003). They assumed that the costs of all the products will remain fixed and thus, determine a profit or a loss situation for the new product. The analysis and results helped in deciding whether to undertake the new product development or not. Furthermore, this technique gave them upper hand on the price strategy for the product in development stage. This method is known as cost-volume-profit analysis and uses a CVP calculator that calculates the market saturation, profits/losses, volume of units sold, and ROI, etc. The CVP analysis, however, is used to determine short term price strategies as it is based on fixed cost analysis instead of variable costs. In the long term, the costs for all works become variable and therefore, CVP analysis cannot predict correct results for the product cycle. Ghaus (2011) postulates that the elasticity of demand determines the prices and supply of the product. For instance, ZDnet was criticized to destroy the tablet market with the initial price of $499 per unit. Ghaus (2011) however, argued that the initial price did not destroy the tablet market instead, it has clarified that the price of tablet computers should be between $250-$300 only. Furthermore, Ghaus (2011) highlighted that the demand for tablet computer is elastic and as the price will go down, the demand will instantaneously increase and vice versa. On the other hand, Shiloy (2011) undertook a study to find that the total estimated market for tablet computers in 2011-2012 is around 50-60 million sales. She also highlighted that some of the tablet computers are priced at $500 initially which is only opening more opportunities for the notebook computers that are cost effective as well as good value for the price. Apple has been able to sell 50 million iPad tablets in 2010 whereas, Samsung sold only 2 million units of Galaxy 7 tablet. In the upcoming years, it would be difficult for a tablet to remain attract in the highly competitive market with a high price tag. Shiloy (2011) however, postulated that a price of $200-$250 will be the most attractive selling price for tablets. Though, this price is not reachable in real world due to the fact that the technology used in the tablet computers is expensive and secondly, the market leaders do not intend to make tablet computers a common technology that is in reach of every household. 3.1 X5 Keeping in perspective the above market analysis for tablet computers, it is found that less price per unit will increase the volume of tablet computers sold each year. Likewise, the price for product X5 in the year 2012 will be kept at $263 but only 15% of R&D budget of $22,000,000 will be allocated for it. As a result, the R&D costs will come to $3,000,000, fixed costs to $70,000,000 and total fixed costs to $73,000,000. The target profit was $152,299,584, unit cost was set at $145 thus, the volume (unit sale) comes to $1,928,810. In the year 2013, the price is decreased to $250 but the R&D budget is kept at same level. The unit cost is decreased to $130 and the expected profit is $162,299,584. Thus, the volume decreases to $1,379, 997. In the year 2014, the price is kept stable but the unit cost is decreased to $125 whereas, the target profit is kept stable. As a result, the volume further lowered to $1,324,797. In the year 2015, the price is increased to $255 and R&D allocations are increased to 20% whereas, all other factors are kept stable. The volume further lowers to $1,282,304. At this point, the R&D allocations are increased in order to began increasing the volume in the future. In this case, the product X5 is a premium price product and its price cannot be furthered lowered from $250. However, to maintain multiple products in the market at the same time, it is important to stabilize the R&D allocations until the last year after which the R&D allocations will be increased to simultaneously increase its demand. Due to the penetration pricing strategy, in the period 2010-11, the product X5 the price was $265 and experienced a growth of 64% in its overall sales and revenue. The customer base also experienced 61% new customers, 94% repeat sales and 103% profitability. Furthermore, the R&D costs deteriorated by -33%. However, with the changed pricing strategy and R&D allocations, the product X5 experienced a growth of 65% in sales, 18% in new customers, 20% in repeat customers and 30% profitability in the year 2012. In the year 2013, the product X5 experienced a growth of 69% in sales, 20% in new customers, 25% in repeat customers and 55% profitability. Likewsie, in the year 2014, the product X5 experienced a growth of 75% in sales, 23% in new customers, 34% in repeat customers and 56% profitability. In 2015, the product X5 experienced a growth of 80% in sales, 30% in new customers, 50% in repeat customers and 60% profitability. 3.2 X6 The price for product X6 in the year 2012 will be kept at $300 but only 40% of R&D budget of $22,000,000 will be allocated for it (See Annex 1). As a result, the R&D costs will come to $8,800,000, fixed costs to $60,000,000 and total fixed costs to $68,800,000. The target profit was $200,984,584, unit cost was set at $125 thus, the volume (unit sale) comes to $1,541,626. In the year 2013, the price is decreased to $290 but the R&D budget is kept at same level. Thus, the volume increases to $1,635, 058. In the year 2014, the price is further decreased to $240 whereas, the target profit is kept stable. As a result, the volume further increased to $2,345,953. In the year 2015, the price is decreased to $200 whereas, all other factors are kept stable. The volume further increased to $3,597,128 (See Annex 2). Comparatively, in the period 2010-11, the product X6 the price was $420 and experienced a growth of 126% in its overall sales and revenue (see Annex 1). The customer base also experienced 124% new customers and 81% profitability. However, the R&D costs deteriorated by -33%. However, with the changed pricing strategy and R&D allocations, the product X6 experienced a growth of 55% in sales, 28% in new customers, 21% in repeat customers and 31% profitability in the year 2012 (See Annex 1). In the year 2013, the product X6 experienced a growth of 59% in sales, 29% in new customers, 35% in repeat customers and 45% profitability. Likewsie, in the year 2014, the product X6 experienced a growth of 65% in sales, 32% in new customers, 36% in repeat customers and 46% profitability. In 2015, the product X6 experienced a growth of 70% in sales, 35% in new customers, 49% in repeat customers and 50% profitability. 3.3 X7 The price for product X7 in the year 2012 will be kept at $210 but only 45% of R&D budget of $22,000,000 will be allocated for it (See Annex 1). As a result, the R&D costs will come to $9,900,000, fixed costs to $40,000,000 and total fixed costs to $69,900,000. The target profit was $139,900,000, unit cost was set at $140 thus, the volume (unit sale) comes to $2,711,429. In the year 2013, the price is increased to $215 but the R&D budget is kept at same level. Thus, the volume decreases to $2,530,667. In the year 2014, the price is further increased to $220 whereas, the target profit is kept stable. As a result, the volume further decreased to $2,372,500. In the year 2015, the price is increased to $225 along with a decrease in R&D allocation to 40% thus, the volume further decreased to $2,220,000 (See Annex 2). Comparatively, in the period 2011-12, the product X7 the price was $195 and experienced a growth of 126% in its overall sales and revenue. The customer base also experienced 124% new customers and 81% profitability. However, the R&D costs deteriorated by -33%. This product was discontinued production in order to focus more on the other two products that were in the growth stage. 4 Conclusion The new strategy using CVP analysis has focused on X5 product in terms of its price but less allocation of R&D allocation in order to keep the other two products high on R&D investments. Thus, when X5 will attract less number of sales in one year, the other two products will attract higher number of sales volume. Overall, this strategy will help the Tablet Development Corporation to keep manufacturing all of its core products without discontinuing any of them. At the same time, it will allow Tablet Development Corporation to invest standardized amount of resources to each product and continue to produce a standard volume for sale purposes. As a result, the supply and demand of the product will remain balanced. At the same time, it will remain References Ghaus, J., (2011). Elasticity? Retrieved March 15, 2012 from http://prolifiq.com/corp/blog/elasticity/ Hendrix, P., (2010). If we build it, will they come? Tablet Adoption and Usage Tracking. Retrieved March 15, 2012 from http://www.slideshare.net/pehendrix/dr-phil-hendrix-immr-build-it-and-they-will-come-i-pad-and-tablets-conf-20101006f Morse, Q., (2003). Cost-Volume-Profit Analysis and Planning. Cambridge. Retrieved March 14, 2012 from http://www.cambridgepub.com/managerialaccounting/070-103_Ch%2003_Morse.pdf Shiloy, A., (2011). Tablets need to get into $200-$250 range to become popular - Analyst. Retrieved March 15, 2012 from http://www.xbitlabs.com/news/mobile/display/20110217101912_Tablets_Need_to_Get_into_200_250_Range_to_Get_Popular_Analyst.html Annexes Annex 1 Strategy Decision Matrix using Penetration Pricing Strategy Product Decision 2012 2013 2014 2015 Price $180 $185 $190 $200 R&D% 35% 40% X5 Discontinue? No No No No Price $300 $310 $320 $330 R&D% 35% 40% 46% 50% X6 Discontinue? No No No No Price $50 $60 $70 $80 R&D% 30% 20% 18% 14% X7 Discontinue? Yes Yes Yes Yes Annex 2 Strategy Decision Matrix using CVP Analysis Product Decision 2012 2013 2014 2015 Price $263 $250 $250 $255 R&D% 15% 15% 15% 20% X5 Discontinue? No No No No Price $300 $290 $240 $200 R&D% 40% 40% 40% 40% X6 Discontinue? No No No No Price $210 $215 $220 $225 R&D% 45% 45% 45% 40% X7 Discontinue? No No No No Read More