Mathematica Limited*

Pricing in a Volatile Market On SEPTEMBER 5 and 6, 1996, the data Products Division of DCM inserted a full page advertisement in the major English language dailies announcing a 'dramatic' price cut for its line of pocket and desk calculators. About two weeks latter, the Televista line of calculators, which was one of the main competitors of DCM, announced a matching price cut. Other major calculator marketers also announced price cuts and a barrage of competing claims appeared in the print media (see Exhibit 1). A price war had begun. It was in such a volatile market the Mathematica Limited was planning to introduce its Mathematica line of scientific and business calculators. GENESIS Mathematica was a wholly owned subsidiary of Pavan Electricals Limited, a large manufacturer of electrical and electronic goods. Pavan Electricals was established in 1941 as a company manufacturing household and industrial fans. Capitalising on the wartime requirement of motors and generators, the company diversified into a wide range of electrical machinery. In the mid-sixties, the company entered the field of electronics by starting to make control devices for electrical motors and generators. The range of electrical products manufactured by the company soon expanded to include process control and laboratory instruments. Later some consumer electronic items like tape recorders and amplifiers were added. In 1995, the total sales of Pavan Electricals crossed Rs. 100 crores. Pavan Electricals had started exporting fans to the Australian, Asian and African markets in the early 1960s. By 1994, the range of products exported as well as the number of markets served had increased considerably. Export exceeded Rs. 60 crores in 1994. because of its export earning, the company had import licenses available for the import of

electronic components. The company was looking for ways to utilise these import licenses profitably. With an eye on the growing electronic data processing business, the top management of Pavan Electricals decided to enter this field. An application for a license to manufacture electronic calculators, microprocessors, and micro and minicomputers was submitted to the Government in late 1994. The license was obtained in June 1995 and Mathematica Limited was floated in November of the same year. The manufacturing plant was expected to be commissioned in January 1997. To begin, Mr. Rakesh Jhamtani, the managing director of Mathematica, was pondering on the pricing strategy he should adopt for the Mathematica line of calculators. THE CALCULATOR INDUSTRY The first electronic pocket calculator for the mass market appeared about three decades age in the Western countries. The desk models came slightly earlier. However, electronic calculators became popular consumer products only in the early seventies. In India, the desk models were introduced by the DCM under the brand name Moscal in late sixties and the pocket models in early seventies. Being the pioneer, DCM had a competitive edge in the field. However, in 1995, this edge was fast disappearing and major competitors like Televista, Nelco and Weston were making deep inroads into DCM's market position. It was estimated that nearly three-fourths of the calculators sold were accounted for by these firms. In addition, more than a dozen other competitors were in the field. Some of these were strong competitors for particular types of calculators, e.g., Aristo for slide-rule models and Keltron for the desk models. Other competitors had regional strength, e.g, UMS in Southern India. The basic components of a calculator- the Integrated Circuit (I.C.) chip which constitutes the 'brain' and the Light Emitting Diodes (LEDs) which form the display- were standard components. These components were imported. Only a handful of US firms manufactured these basic components and supplied them to calculator manufacturers throughout the world. Some Japanese firms had started making a dent in the field of basic components and price competition was keen. The retail price of basic four function 2

calculator with a single memory had plummeted from $ 70 to less than $ 10 in the American market.' On a recent visit to Europe and North America, Mr. Jhamtani had come to know that pocket calculators were likely to become standard stationery items even in primary schools. When this happens, the demand for calculators would increase and price of the basic four function calculator with single memory would plummet below $ 5 in these markets. It was believed in the industry that the price would stabilise in the $ 3-5 range in the Western markets because the costs of production and distribution would constitute a natural floor at this level. Mr. Jhamtani felt that the price reductions in the Western markets would be reflected in the price reductions in the Indian markets sooner or later. Of course, the reductions would not be as much because of the various taxes and duties. Also the relatively small size of the market would not permit the scale economies to the same extent as in the Western countries. THE PRODUCT RANGE The calculators- pocket as well as desk type- were available in several models with different functional capabilities. Starting from the basic four-function pocket model without memory the calculator product range extended upto programmable desk models with casette transport for programme storage. At the lower end of the range, electronic calculators competed with adding machines and slide rules. At the higher end of the range, calculators competed with micro and mini-computers. Of course, a formidable competitor throughout the range was the human mind with its somewhat slow but amazing computational ability. In a country where cost of labour was relatively low, manual computation was expected to be a major force constraining the growth of electronic computation. The range of calculator models commonly available in the market is shown in Exhibit 2. New models with minor improvements in functions and features were introduced in the Western markets from time to time. The Indian calculator makers introduced the same

1. Note ( The exchange rate in 1996 was approximately US $1=Rs 35) models with a lag of six months to a year. Thus, product development was an industry wide phenomenon and no one manufacturer had much of a lead over others. Unlike some of the smaller manufacturers, Mathematica planned to introduce the complete range of calculators. Thus the Mathematica line was going to be in direct competition with lines like DCM, Nelco and Televista. NATURE OF COMPETITION Although the capacity of the industry was about to reach 2000000 units per year, production had barely exceeded 200,000 units in 1995 (see Exhibit 3). Mathematica had an approved capacity of 200,000 units and was expecting a letter of intent for another 100,000 units shortly. Because of the substantial unused capacity in the industry, Government had decided not to entertain applications for further licenses. Idle capacity in the industry was leading to stiff price competition between the various manufacturers. Other factors contributing to price competition were (i) nearly identical product features and cost structures, (ii) declining world prices of calculator components, and (iii) the failure of the market to grow as fast as anticipated. Calculator components like IC ships and LEDs were imported in relatively large lots to take advantage of bulk discounts. However the manufacturers tended to delay their orders in the hope that prices of components in the world market would decline further. The inventories of the calculator manufacturers fluctuated considerably because of such component buying practices. The result was that calculator buyers often had to wait for a few weeks to get delivery after placing an order. Mr. Jhamtani learned that one leading manufacturer had a two month delay in its delivery schedule of the popular low-priced model. Because of this, many disenchanted buyers were turning to competitive models which had shorter delivery period. The demand for calculators exhibited a seasonal peak in the first and last quarter of any calendar year. In the first quarter, the peak was due to

increased demand from Government offices at the time of financial year ending. The commercial and bank year ending was responsible for the peak in the last quarter. Since the basic components were highly standardized, competition in terms of product features was minimal, especially at the lower end of the product range. Reliability, research and development, service, quality control, etc, were the main appeals used by the major manufacturers to promote their products. In fact, before announcing the price cut in September 1996, DCM had conducted a careful promotional campaign stressing all these selling points. PRICE BEHAVIOUR Mr. Jhamtani had observed that the price decline in the market was rather precipitate. In fact, all the pricing plans Mathematica had made earlier in 1996, were already outdated. The basic four-function, single memory pocket models of prestigious brands had a delivered price well above Rs. 600 just one year ago. The less well known brands were approximately 20 percent cheaper. By May 1996, the major brands were already selling their basic model around Rs. 500. The price dipped to below Rs. 450 in July 1996 and to around Rs.400 by August. With the September price cut, the delivered price of leading brands (basic model) had crashed to around Rs. 350. The less well known brands were cheaper by as much as Rs. 100 for the basic model. The delivered price consisted of the basic plus various duties and taxes. The price structure for various models can be judged from the excerpts taken from a sales promotion letter sent by one of the leading companies to its clients (see Exhibit 4). THE COST STRUCTURE Examining the price trends, Mr. Jhamtani felt that further price reductions were quite likely. The main reason for the declining trend was the constantly falling price of

components2. It was also clear to Mr. Jhamtani that given the structure of the calculator industry, price reductions would be an industry-wide phenomena. Reviewing his cost structure of the basic four-function model with a single memory, Mr. Jhamtani came up with the figures given in exhibit 5. For other models, the cost structure was similar and proportional to the prevailing market prices of competitive models. It seemed to Mr. Jhamtani that the profit margins at the prevailing prices were quite low but there was a good probability of the margins being squeezed further, especially at the lower end of the product range. He knew that the larger manufacturers were in a position to slash their prices of the basic model to Rs. 200 or even lower provided they could maintain their margins on the higher-priced models. In fact, the large companies might adopt this strategy precisely to squeeze out lower-priced small competitors who had only one or two models to offer. Further reductions in component price could also be expected for the next year or so, thereby increasing the pressure on prices. SOME CONCERNS With Mathematica calculators targeted to hit the market in less than two months. Mr. Jhamtani's immediate concern was the introductory pricing strategy for the entire product line. It was quite evident that Mathematica would be plunging into the front line of the competitive fray. One possibility being seriously considered by Mr. Jhamtani was to introduce the Mathematica line at prices significantly lower than those of the leading brands. His reading of the market indicated that the price cut was imminent; it was only a matter of time. By pricing the basic four-function model with single memory at Rs. 250 (delivered price) and other models at proportionately lower prices. Mr. Jhamtani felt that the Mathematica line could make a sizeable foothold in the highly volatile calculator market. The low price, together with ex-stock availability of the calculators, would build

(2. The prices of Integrated circuit were constantly falling. Any new IC introduced in the US market was likely to experience a price drop of over 90% in two years) up a consumer franchise for the new line rather rapidly. In Mr. Jhamtani's opinion, the leading brands had only recently announced a price cut and the market had just achieved some degree of 'stability'. In such a situation, the competition would not meet a new price cut immediately. Mr. Jhantani expected that Mathematica would get a clear lead time of at least two months before competition retaliated. By gearing up its sales and distribution effort well in advance, Mathematica could entrench itself as a front-line brand in these two months.

Mr. S.K. Ganguly, the marketing manager of Mathematica, had grave reservations about this introductory strategy. He pointed out that the DCM's price move had been followed by all the leading brands within less than three weeks. To this Mr. Jhamtani responded that DCM was perceived as 'price' leader but no such perceptions were associated with Mathematica. The confusion created by Mathematica's entry would give the company enough time to create a foothold in the market. Mr. Ganguly remained unconvinced. He argued that the pricing strategy should be viewed in a long-term perspective. A low introductory price for the entire Mathematica line would leave no maneuverability for the future. He also pointed out that the pricing policy should be viewed in the context of the product and promotion policies. He felt that Mathematica should stay clear of the chaotic price competition at the lower end of the product range. By supporting the product launch with a well-orchestrated advertising campaign stressing the technical excellence of Mathematica line, the company could try to tap the higher end institutional and industrial market. This would facilitate Mathematica's future entry into the micro and minicomputer fields. Mr. Jhamtani argued that the industrial customers likely to buy the programmable and other high priced calculators were even more sensitive to price than the potential customers of pocket models. However, to discuss the pricing options more fully, Mr. Jhamtani agreed to convene a meeting of the top-level corporate policy Committee of Mathematica in which senor executives from Mathematica as well as from parent company were represented 7

EXHIBIT 1
COMPETITIVE CLAIMS APPEARING IN PRINT MEDIA ADVERTISMENTS AFTER SPETEMBER PRICE CUT

Based on the more prominent ads surveyed in Times of India and Economic Times Date of Ad. 6 Sep.96 Company DCM Head line Major claims/Product features/ Copy elements -'This is probably the most -A matter of progress important ad you have ever -economy of scale seen' -'why on earth should company marketing the largest selling range of calculators dramatically reduce prices?' 21 Sep.96 Televista - 'All that the calculator price -leadership cut needed was a Televista - value for money endorsement' 'What else is competition all about?' 7 oct.96 Bus. Mach. Pvt.Ltd. 'We share the rewards of law -Aristo now officers a price (Aristo) 21 oct.96 Nelco of increasing returns with you' Prices you will smashing electronic slide rule -cost reduction a 'Research keeps us ahead'

never - 72 - step programming capability

question 2 Nov.96 Nelco

-Last week, I boxed with - 'Let's say they're both the Mohammed Ali, and threw in greatest. As world champions the towel' 'Rubbish! I in telling tall tales ... Such rival knocked claims mean nothing .

Mohammed Ali clean over the - 'All you want is performanceropes. So I m the greatest' Nelco calculators are committed to your trust' -'even handed pricing policy' -unmatched record of repeat purchase' -'A reputation built on sheer performance' 5 Nov.96 Nelco - Shri Gopal Chaudhary swears -'You never know what to he ate rasgullas at a paise each believe these days .... weirdest in a Chinese restaurant on top tales ... white wash of words' of Mount Everest' 8 Nov. 96 Blue (Solutron) (Rest of claims similar to Nov. 2 ad. Star ' An important announcement -'We will compete tooth and from the solutron/men... the nail to give you a better and people who gave you Solutron wider choice, at the best 2101... the fastest selling price... never compromising on product performance' -'Here are 2 more pocket calculators to prove it' 13 Dec. 96 Keltron -'After you've calculated the -Know-how gains of all other offers, you'll -Proven sure come back to Keltron' Quality, functional design, wide range -reasonable price -prompt after-sales service strengths or pocket calculator'

EXHIBIT 2 RANGE OF CALCULATORS COMMONLY AVAILABLE IN MARKET (1) 1 (2) Pocket (3) Pocket Calculator (4) 4 basic functions often % key, 8 digital display. 2 Pocket Pocket Calculator (with memory) 4 basic functions, often % or

reciprocal/root keys, one memory, 8 digit display.

Pocket

Slide Rule

4 basic functions, log, exponential & trigonometric functions, roots, multiple memory, 8 digit display.

Desk

Single Memory

4.basic functions, % roots, often item counter, one memory, 10-12 digit display

Desk

Scientific

4 basic functions, log, exponential & trigonometric functions, roots, multiple memories, 10-12 digit display

Desk

Memory Printer

Similar to 4 with direct. 00 and 000 entry, 12-15 column printed output.

Desk

Programmable Calculator

scientific calculator with programming capability for 70-100 step

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programmes. Note : Mathematica planned to introduce the whole range plus a few special models.

EXHIBIT 3 CAPACITY AND PRODUCTION OF ELECTRONIC CALCULATORS

Approved Capacity Sector large scale Small scale Total Total 89,0000 80,6000 1,69,0000 For export Letter intent capacity Total 14,0000 14,0000 For export Production 1994 34000 60000 94000 1995 103000 100000 20,300 Demand Projection 1998-99 500000 500000

only 56,7000 36,8000 93,5000

only 7,8000 7,8000

EXHIBIT 4
EXCERPTS FROM SALES PROMOTION LETTER OF A LEADING CALCULATOR MARKETER

Dear Sir, We take great pleasure in informing you of the recent REDUCTION in the price of Electronic Calculators marketed by us. We trust you will find these attractive and look forward to receiving a favorable reply from you.

Model

Basic price

Excis e@ 15 %

Adaptor

Sales tax @ 10 %

Freight insuranc e 10.00 10.00 50.00

Delivered price

4 function, no memory, pocket 4 function, one memory, pocket 25 function, programmable scientific, desk

330.00 380.00 2000.00

49.50 57.00 300.0

40.00 40.00 -

41.95 47.70 230..00

Now 471.45 534.70 2580.00

Before 770.00 850.00 3483.00

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Octroi as applicable will be payable extra. 2 per cent discount will be allowed for payments against delivery. The following quantity discounts are available for bulk purchases: Pocket models 6 to 10 11 to 15 16 to 25 3% 5% 7% Desk models 4 to 6 7 to 10 11 to 15 2% 4% 5%

26 & above 10% 16 & above 6% If you want our sales representative to call on you please let us know. EXHIBIT 5 COST STRUCTURE OF BASIC 4 FUNCTION MEMORY MODEL TO BE PRODUCED BY MATHEMATICA Item IC Registers (memory units) Driver (amplifier) LEDs (7 Nos. @ Rs. 3.00) Keys Plastic body Packaging Battery Eliminator Direct labour Allocated overheads @ 25% Excise duty (on purchased components) Total Note : 1. 2. The plant cost Rs. 40 lakhs to Mathematica. Administrative and selling overheads were expected to turn upto Rs. 10 lakhs per year. Cost 20.00 20.00 15.00 21.00 10.00 10.00 5.00 25.00 15.00 35.50 18.30 180.8

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Based on the case Mathematica limited, Answer the following questions: 1. 2. 3. 4. Evaluate the introductory pricing strategy proposed by Mr Jhamtani. What are the pros and cons of the same? What factors should Mathematica take into consideration while setting the introductory pricing strategy? Discuss. What alternative pricing strategies are available to Mathematica? How should Mathematica go about selecting an introductory marketing strategy, particularly the pricing strategy? Make recommendations with reasons for the same. Readings: 1. Chapter 14 from Marketing Management XIIth edition (south Asian perspective), Kotler ,Keller, Koshy and Jha 2Additional reading is on strategic pricing

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