In a recent staff meeting, John Winkleman, president of ePrecision Manufacturing Company, addressed his managers with this problem: Intense competitive pressure is beginning to erode our market share in handhelds. I have documented 11 large orders that have been lost to Beckman and Wiston within the past three months. On an annual basis this amounts to nearly 10,000 units and $1.5 million in lost opportunities. Within the last 18 months, at least 16 serious competitors have entered the market. Two thirds of these DMMs have continuity indicators. The trend is the same for European and Japanese markets as well. Our sales of handheld DMMs in fiscal year 20_1 is forecast to grow only 1.7 percent.
According to Dataquest projections, the handheld DMM market will grow 20.9 percent for the next five years. I think that figure is conservative. Our competitors are gaining attention and sales with added features, particularly at the present time with continuity indicators. Since a new el’recision general-purpose, low-cost handheld is two years from introduction, it is important that something be done to retain the profitable position of market leader in our traditional direct and distributor channels. Next meeting I want s?me ideas.
The ePrecision Manufacturing Company is a major electronics manufacturer in the Northwest of USA, producing many varied products. The three products that most concern Mr. Winkleman are the Series A handheld digital multi meters (DMMs). As an innovator in the field of handheld DMMS, Mr. Winkleman saw his business flourish over the last two years. But now, with his three most successful products in late stages of maturity and a recession in _ full swing, times are not looking as rosy. The three multimeters of concern are model numbers 1010, 1020, and 1030. These three models form a complementary family line.
The 1010 is a low-cost unit containing all standard measurement functions and having a basic measurement accuracy of .5 percent. The 1020 offers identical measurement functions but has an improved basic measurement accuracy of .1 percent. The top of the line is the 1030. In addition to a basic accuracy of .1 percent, the 1030 offers several additional features, one being an audible continuity indicator. (See Exhibit 1 for sales and projected sales of these three models.) EXHIBIT 1 Selected sales and projections Model 1020 1010 1030 Total FY 20 0 actual 67,534 37,455 25,602 130,591 (number of units)
What we need is a face-lift of our existing product line to hold us over the next two years. Changes in color, a new decal, some minor case modifications, and most important an audible continuity indicator in the 1010 and 1020 should give us two more years of product life to tide us over. We can call this Series B to retain continuity in switching from the old to the new. As my analysis indicates, ePrecision’s decline in 101011020 sales could be reversed and show a modest increase in market share over the next two years with the inclusion of the Series B features [see Exhibit 2]. Discussions with large-order customers indicate that ePrecision could have won 40-60 percent of the lost large orders that were mentioned at our last meeting if our entire handheld family featured audible continuity.
As you well know, the popularity of continuity indication has been confirmed in several other studies conducted over the past two years. An estimate of sales of Series B has been generated from inputs from field sales, distribution managers, and discussions with customers. Conservative estimates indicate that sales of Series B will increase 6.9 percent above current Series A levels, with a marginal revenue increase of $1.5 million at Us. list, and assuming the same list prices as the current Series A models.
During this current period of tight economic conditions, the market is becoming increasingly price sensitive. I am aware that our normal policy dictates multiplying the factory cost by three for pricing purposes and that the added factory cost of an audible continuity indicator is $5.00,. but for income purposes we should not tack this on to the current prices. My analysis indicates that an increase of $5.00 would reduce incremental sales by 20 percent, and an increase of $10.00 would reduce incremental sales by 80 percent.
EXHIBIT 3 Engineering Costs and Schedule The objectives for Series B, Models 1010, 1020, and 1030, are: • All case parts moulded in medium grey • New decal for all units • Pulse-stretched beeper for 1010 and 1020 • Rubber foot on battery door • Positionable bail • Manuals updated as necessary For these objectives, NRE costs will be: Manual (updated schematics for 1010, 1020, along with instructions for operation of beeper; model number and front panel changes for all units) Battery door mould (add three units) Battery door foot die Decal Bail improvement Photo lab PCB fab (prototypes) Engineering labour (25 person-weeks)
Also remember that we must pay for some nonrecurring engineering costs (NRE) [see Exhibit 3]. These must come out of our contribution margin-which at el’recision is calculated by taking the total dollar sales less the 28 percent discount to distributors less factory cost for those units. I believe that increasing these prices will reduce our margins significantly, hindering our ability to cover the NRE, let alone make a profit. Therefore I propose we go ahead with Series B and hold the line on prices. Dennis Cambelot, a longtime ePrecision employee, spoke up with a comment on Dave’s proposal: Dave, I think this Series B idea shows a lot of potential, but pricewise you are way out of line.
We have always added the standard markup to our products. We make quality products, and people are willing to pay for quality. The only thing your fancy MB.A. degree taught you was to be impractical. If you had gotten your experience in the trenches like me, your pricing theories would not be so conservative, and this company could make more money. At the close of the meeting, Mr. Winkleman asked that each manager consider the Series B proposal. He directed that this consideration include: (1) whether or not to adopt the B series; (2) if yes, at what price level; (3) alternative suggestions.