Augat Electronics, Inc.
The company being analyzed in this case is Augat Electronics, Inc. They have a pricing dilemma with regard to their entry into Canadian TV market with their new product called the Snap-N-Seal. Developed by their LRC Division, the Snap-N-Seal is a connector that provides complete protection of the coaxial cable, which provides the subscriber with their signal to their TV. The Snap-N-Seal is considered to be superior to the leading connector currently on the market called the EZF connector, which was developed by a company called Raychem. The Snap-N-Seal is superior to the EZF connector with regard to its reliability and durability. For example, the Snap-N-Seal’s success rate when it came to connectivity is virtually 100 per cent while the EZF connector’s was closer to 80 per cent. Additionally, the Snap-N-Seal is easier to install than the EZF connector. Thus, making it a better choice for cable operators economically. Unfortunately for Augat, Rogers – the largest Canadian cable operator – has just adopted the EZF connector for 100 per cent of their connections across the country that require connectors.
The pricing strategy that I would recommend for Augat would be one that is comparable to the other leaders within the target market, which is the Canadian TV market. This type of pricing strategy would be relevant and profitable. Firstly, given that the EZF connector’s manufacturing costs are estimated to be 20 per cent lower than that of the Snap-N-Seal’s, this suggests that the EZF connector is a cheaper product in terms of quality and price. This is based on the assumption that every company in this industry has access to the same technology to produce their product. Secondly, when determining the price of the Snap-N-Seal, it is important to remember the “profit maximizing firm” assumption. What this entails is that every firm will produce units until their marginal revenue equals their marginal cost, which means that the revenue and the cost is the same if they produce one additional unit. Thus, the price of the Snap-N-Seal should be set 20 per cent higher than the EZF connector since their manufacturing costs are 20 per cent higher than the EZF connector. So, given that the price of the EZF connector is $0.72, the Augat should set their price for the Snap-N-Seal at $0.87 – 20 per cent higher (rounded up). I would even recommend setting this price slightly higher at $0.90; given the economic benefits the Snap-N-Seal brings to the cable providers stated is the paragraph above. Also, given that the tool for installing the Snap-N-Seal could be bought for US$50 each from an outside supplier and given that they typically aim for a 25 per cent margin on their tools, they could sell their tool for around the same price as the EZF tools. This price would be around $75 to $80.