To: Deere & Company Senior Management Team

From: Robert Gerstenberger

Date: November 15, 2010
Subject: Deere & Company Pricing Strategy for Launch of JD 750

This memo recommends a pricing strategy of pure parity for the launch of the JD 750
Bulldozer, one of Deere & Company’s most audacious ventures yet. Because this product
launch addresses a market space in which Deere is not a dominant player, this strategy aims
to provide incentives to industrial customers and existing Deere dealers to embrace a new
technology. By launching this pricing scheme through an aggressive $300k promotional
campaign, Deere & Company may expect to earn line profits of $45M, and establish itself as a
major player in a new lucrative market segment.

Background
Deere has an established reputation for quality in the small crawler tractor market
segment, and has built considerable brand loyalty among this purchasing group, along with
more than 50% market share. Deere has not, however, enjoyed this significant level of share
in the heavy construction industry and has never offered a product as large as the new JD 750.
Over the past 10 years, we have invested nearly $70M in development and production for
this innovative new line, and are ready to begin promoting the JD 750. We have received a
promotional budget of $300k, and must decide on the price to communicate to our dealers.

Recommendations
I recommend that Deere & Company price the JD 750 at the same market price as the Cat
D5 product. By pricing at parity and focusing our advertising on the superior performance
and standard higher quality feature set of our JD 750 in comparison to the Cat D5, we can
capture market share and bring in an estimated $45M in line profits.

Basis for Recommendations

Financial analysis of projected revenues and market shares from the three pricing options
shown in Exhibit 1 indicate that from a purely financial position, pricing at parity results in
the most profitable outcome by a small 1% margin over pricing below. It is possible that by
pricing below we could earn more market share than our current projections. However, such
a pricing scheme could damage Deere’s brand identity as a quality player instead of a value
player. Accordingly, we feel that pricing at parity and protecting the brand is the best
strategy.
Additionally, major construction customers are less sensitive to the initial price than our
smaller crawler customers. In this new space, reliability, features and parts availability are the
driving factors behind purchasing decisions. By pricing at Cat D5 levels, we will be focusing
buyers’ attention on our improved drive train, superior standard set of included features and
productivity increases of 10-15%, all of which are superior to the Cat D5.
Finally, we project Deere to break even in the middle of our 2 nd year on the market after
selling 3,425 units. This is the earliest of the 3 potential strategies.
Next Steps
Immediately launch the $300k marketing blitz to all dealers and consumers in the large
contractor market with an emphasis on the lower price per horsepower and standard, higher
quality feature set in comparison to its competitor in this space, the Cat D5. Emphasize that
operators can expect to achieve a 10-15% increase in productivity with the JD 750 for the
same price as they would pay for the D-5.
Exhibit 1 – Options Matrix

Option 1 Option 2 Option 3

Description of Price JD 750 slightly Price JD 750 at Parity Price JD 750 above Cat
Option (5%) below Cat D5 with Cat D5, D5, maintain standard
price levels, maintain maintain standard JD JD pricing on parts,
standard JD pricing on pricing on parts, dealer discounts.
parts, dealer discounts. dealer discounts. Communicate
Communicate Communicate increased value based
combination of lower increased value based on greater inclusion of
price and increased on greater inclusion features in base price,
value based on greater of features in base superior horsepower
inclusion of features, price, superior (can use $/HP as well),
superior horsepower horsepower (can use and higher productivity
(can use $/HP as well), $/HP as well), and of 10-15%. Emphasize
and higher productivity higher productivity of commonality of parts to
of 10-15%. “Reduce 10-15%. Emphasize existing products to
costs from day 1”. commonality of parts influence large
Emphasize to existing products contractors, whose
commonality of parts to influence large purchase decisions are
to existing products to contractors, whose heavily influenced by
influence large purchase decisions parts availability.
contractors, whose are heavily
purchase decisions are influenced by parts
heavily influenced by availability.
parts availability.
Overall Strategy is to quickly Deere Crawlers have Deere’s primary sales
Assessment gain market share by typically been priced channel is through
under-pricing with a comparably with dealers, who prefer to
higher quality product. lower performance, sell higher margin
Expected lower horsepower products if possible.
improvements in competitor offerings. Offering the JD 750 at
production efficiencies Introducing the JD a higher price will
will eventually lower 750 priced at parity serve as an increased
costs of hydrostatic will need less incentive for them to
transmission explanation, but replace lower-margin
production below that potentially leaves units with higher gross
of a standard money on the table margin products like
transmission. Due to from less price- the JD 750.
significant competition sensitive customers.
from aftermarket parts This strategy will Additionally, even at
manufactures, there is increase Deere’s this higher point, the
no opportunity to market share in this JD 750 is cheaper per
increase parts pricing space, while HP than the Cat D5,
to offset the lower maintaining brand and cheaper overall
margin. equity by not with matching feature
 underpricing. sets.
Strategic Fit This strategy would be This fits with Deere has always
(Core a poor fit with Deere’s Deere’s, and indeed offered more features
Competencies) traditional pricing the industry’s as part of the base
practices. historical approach to product offering, and
smaller tractors, to set priced similarly to
a margin target for competition. By
the base unit and continuing to offer
price additional greater features, and
features and options. adding innovation and
Deere however has reliability, Deere can
consistently offered still price lower per
more features than horsepower, but
competitors in the command a higher up-
same space, giving it front price based on
excellent margin but this increased value.
potentially leaving
some price on the While smaller
table. horsepower-level
customers are more
concerned with initial
price, larger industrial
customers (potential
750 customers) base
buying decisions on
quality, parts and
reliability, and are
willing to pay more up
front.
Financial Deere estimates the If Deere decides to If Deere prices the JD
Attractiveness total market for JD 750 pursue a parity 750 slightly (5%)
sized crawlers to be pricing scheme, we above parity with the
5,500 units per year. believe they will take D-5, we estimate that it
a 40% market share will take only a 30%
If Deere prices the JD in that space, since market share, as it will
750 slightly (5%) they are currently a be difficult to unseat
below the Cat D5, we weak player and must the more established
estimate that it may break customers’ Cat brand without
take as much as 45% of existing brand loyalty being price-
the market share. to established players competitive. We
With an estimated like Cat. estimate this strategy
standard cost of will earn Deere a profit
$36,110, a 45% market With an estimated of $37.7M annually.
share will earn JD standard cost of Deere will break even
$44.6M annually. $36,110, a 40% after selling 3,062
Deere will break even market share will units, which is expected
after selling 3,885 earn JD $45.0M to occur in the second
 units, which is annually. Deere will half of Year 2.
expected to occur break even after
towards the end of selling 3,425 units,
Year 2. which is expected to
occur in the middle of
Year 2.

Noteworthy • Pricing below the • Very few add-on • Higher offering price
Risks market price for the options above will need
Cat D5 may damage standard base justification through
the John Deere product, cannot sales calls,
brand by eroding its rely on additional advertising, and
image as a quality revenue. nearly all marketing
player and inserting • Lower base price channels.
value-centered anchors parts • Price separation may
perceptions. prices at industry create confusion
• Lower base price expected 65% of among dealers (some
anchors parts prices purchase price for products priced
at industry expected first three years. competitively, some
65% of purchase priced higher).
price for first three • More difficult to
years. draw market share
from established Cat
D5 and lower priced
Case 1150B.
Exhibit 2 – Financial Analysis

Pricing strategy vs CAT 5 % Above At 5% Below

CAT has 50-60%
of
large tractor
Estimated Mkt share based on pricing strategy 30% 40% 45% market
CAT Standard

Gross $ 61,117 100% 59,875

50,84 48,42 46,00
Net $ 48,422 75.39% 45,138 3 2 1
(36,11 (36,11 (36,11
Cost -80% (36,110) 0) 0) 0)
14,73 12,31 9,89
CM 9,028 3 2 1
8,12 8,12 8,12
Parts CM at 90% of standard 8,125 5 5 5
22,85 20,43 18,01
Total CM 17,153 8 7 6
# of Units Sold by JD out of 5,500 Total 1,65 2,20 2,47
Mkt 0 0 5
37,715,86 44,961,40 44,589,35
Total Profit 5 0 3

Break-Even Analysis

Engineering Cost 20,000,000

Capital Expenditures 50,000,000

70,000,000
3,06 3,42 3,88
# of Units Sold To Break Even 2 5 5
Exhibit 3 – Market Share