In 1976, Deere & Company was among the world’s leaders of farm and industrial equipment. The majority of Deere’s success was attributed to the light crawler tractor market with over 50% market share. It was at that time Deere earned a reputation for manufacturing reliable small tractor equipment. Deere evolved into producing and manufacturing the larger industrial equipment in phases, beginning in small forestry operations. As farmers and smaller operators sought to diversify their businesses, Deere offered newly innovative attachments and crawlers, and was now seeking to integrate into the large tractor market in phase five. In this phase, Deere introduced the JD750 bulldozer, a heavy contracting machine that would compete directly with Caterpillar, who maintained 50% market share in the large tractor market. Robert Gerstenberger, vice president for worldwide Industrial Equipment Operations at Deere was faced with questions that needed to be answered as Deere introduced the large tractors, which if launched successfully, could position Deere as the market leader in both the small and large tractor market. The challenge included a successful introduction of this new product, and an increase in Deere’s market share in the large tractor market. The most notable concern would prove to be Deere’s pricing structure and strategy. What pricing strategy should Deere & Company employ for these new models to effectively compete as it enters this new market segmentation? What value added features and parts should be included to maximize consumer demand? This analysis will answer those questions by evaluating the various steps in setting price as it pertains to the implementation of the JD750, price adaptation strategies, and product mix pricing. And after thoroughly evaluating the alternatives, this case will conclude with an analysis of pricing strategy recommendations that Deere and Company should consider.
Analyzing Market Demand
It was estimated that aggregate domestic sales of large tractors would be 9,000 per year between 1977 and 1980. According to USDA data, worker productivity increased significantly after WWII throughout the 80’s as manufacturers introduced improved equipment to meet the needs of operators. Deere’s strategy was “to enter a market by providing superior customer benefits based on technological innovation.” Deere & Company: Industrial Equipment Operations. Government intervention efforts of conservation during the dust bowl years allowed Deere and Company to build relationships with the small farmers and operators, giving Deere the perception of reliability, an important concern for small operators. However, the market for purchasing new equipment was on a decline. According to “The Royal Commission on Farm Machinery”, farm equipment purchases in 1970 had reached a peak of 275,000 units, and has been in a state of decelerating growth. This is typical of a “growth-slump-maturity” sales pattern, and is one that Deere and Company could expect to experience. Sales of the JD750 and JD850 could experience rapid growth when first introduced, but Deere and Company can expect those sales to fall to a leveling-off point with hopeful sustainability by late adopters and product replacements by early adopters. “Marketing Management, Kotler and Keller” pg. 310. Market Segmentation
The tractor market can be segmented into two categories, large tractor manufacturers and small tractor manufacturers. As noted prior, Caterpillar dominated the large tractor market with more than 50% market share, while Deere & Company dominated the small tractor market with more than 50% market share. The competitors in the large tractor market behind Caterpillar consisted of International Harvester, Case, Fiat-Allis, Komatsu and Terex. Let’s consider a perceptual map of the competitors in the large tractor market. “Exhibit 1”. Using the four quadrants evaluating innovation and size, you...