Reasons against the discount

One of the most prominent reasons for not selling the compressor at Rs.93 lakhs is low profit
margins. The Financial Controller believes that the cost of the product, including production,
distribution and service costs would be about Rs.91.3 lakhs, giving the company a profit margin of
only 1.9%. Taking into consideration the cost of patents the company holds, which are responsible
for the proprietary features of the compressor, it can be said that selling the compressor for Rs.93
lakhs will cause a monetary loss to the company. Further, the costs of implementation, rising cost of
raw materials and the devaluation of the rupee all further affect the profit margins of the company.

In terms of product quality, Ingersoll-Rand is one of the leading players in the market. It has spent
invested heavily on sophisticated technology and equipment. It is designed to operate for about 10-
15 years without any problems and delivers the best quality air at low operating costs. Hence, the
quality of the product increases its value significantly and an appropriate premium should be
charged.

As can be observed from Exhibit-3, the market also perceives IRL compressors as premium. The
market outranks IRL large HP compressors against its competitors, on parameters including quality,
reliability and technology leadership. Hence, IRL can leverage this premium image to charge a higher
price, with respect to its competitors.

Furthermore, Deccan Textiles has had problems with compressors in the recent years.
Malfunctioning of the air compressors caused breakdowns on the plant, leading to a loss of revenue
of Rs.8 lakhs each time. Hence, the management can be made to see the importance of quality.

Recommendations

IRL needs the sale to improve its sales growth, however it also needs to focus on its profit margins.
The only way to achieve both these objectives is to renegotiate the price with Deccan Textiles. The
after-tax profit for the company was about 15% in 2000-01, which dipped to 9% the following year.
IRL should price the product in such a manner that it is able to drive the profit margins back up to
15%. This amounts to an ideal selling price of Rs.105 lakhs for the compressor.

The best price of the product is Rs.108 lakhs, which is the discounted price from the list price of
Rs.115 lakhs. It should be clearly communicated to Deccan Textiles that by charging a price of Rs.105
lakhs instead of the best price of Rs.108 lakhs, IRL is making an exception as it values a business
partnership with Deccan Textiles.

Deccan Textiles has a plant breakdown due to quality problems, at least 15 times a year costing Rs.8
lakh each time to the company. If IRL compressors, due to higher quality can reduce the number of
plant breakdowns by even 2 times over a span of 15 years, the increase in price from Rs.93 lakhs to
Rs. 105 lakhs can be justified.

Thus, IRL should start a process of renegotiation. It should send in an executive of a higher ranking
than Sanjay Mehta to apologize for going back on their offer price of Rs.93 lakhs. It can be stressed
that it was an error in judgement on Sanjay Mehta’s part, to offer the product which was priced at
Rs.115 lakhs at Rs.93 lakhs, at a loss. Further, IRL should stress on the monetary value of their
superior quality and convince Deccan Textiles that the IRL compressor is worth the price premium,
due to a reduced number of breakdowns. IRL can even offer a guarantee that if the average number
of breakdowns in the plant increases due to faults in the compression, IRL would compensate for the
loss of revenue due to these breakdowns. Finally, IRL should ask for a closing price of Rs.105 lakhs,
down even from their best price of Rs.108 lakhs, while communicating that Deccan Textiles is a
valued customer and that IRL is looking forward to building a long-term business relationship with
them.