XYZ Company has developed a software that is well ahead of its time. Indeed, the company deals with computer-guided software that provides turbo engine diagnosis for aircraft using the latest machine learning and artificial intelligence. Their most recent installation is the best in the market as it is capable of relaying engine diagnosis faster than the current industry standards. As such, the diagnosis software is the best in the market not only for its speed, but it is also capable of relaying information regarding the engine's health. Based on these facts, it is important to ensure that the company prices for the software not only in regards to the market pricing, but it should also consider key performance indicators (KPI), the quality of service, and its efficiency and effectiveness as compared to the competition (Marburger, 2015). This report is aimed at providing a pricing model and strategy to XYZ Company explaining how some prices were arrived at and the charges for KPI.
The diagnosis software changes how aircraft are repaired and maintained because the diagnosis is not only fast, but it is also accurate. The software has been tested and proven to not only work faster than competition setting new speeds in relaying of important diagnostic information, but it is also accurate using the latest technology which is reflected in the company's costs of repairs and maintenance. Indeed, if an engine problem is diagnosed early, it is possible to repair the issue before it becomes a bigger problem. For instance, if it is an oil leak, faster XYZ software diagnosis tool will stop the leakage before it becomes a bigger problem for the engine manufacturer and considering that the manufacturer is an airline turbine engine, save the company from bigger losses.
XYZ Company aims at selling its software to one aviation engine manufacturer (EM) with a current portfolio of 13,000 turbine engines. The software company is going to charge an annual figure of $180,000 per engine. The price is reasonable not just because the software is the best in the market; it has been approved by engineers in the market industry to be reasonable. Considering the sophistication and quality of the software plus the maintenance, it is a good price which works well for both the XYZ Company and the aviation engineering manufacturer. The report is aimed at making sense of the figures and how they were arrived at and which pricing model was considered.
Indeed, on all the actions taken to improve profitability, pricing proves to have the biggest impact (Zhang, 2005). XYZ Company has been able to undertake all the other actions providing the best product on the market, and the pricing will be the icing on the cake. Many organizations find the pricing process to be extremely frustrating. However, pricing is not hard and key performance indicators can help in this process (Buxmann, Diefenbach, & Hess, 2013). Indeed, a key performance indicator proves to be a huge factor in explaining the reasons for arriving at different prices (Feurer, Schuhmacher, & Kuester, 2018). In this case, towards attaining the final figure of $180,000 for the diagnostics software. The $180,000 can be broken down as $90,000 as the cost of running the software and the remaining $90,000 as the markup.
Bonus Payment Based on Utilization
Other than that, there is a figure that is contingent on utilization increase that is to be received as a form of bonus above the final figure of $180,000. Utilization, in this case, means the flight hour agreement. An increase in the number of hours over the standard time which affects the number of times the software is utilized which should also be paid for. XYZ Company has not yet decided on whether the fee will be a percentage or a fixed fee. It will be wise to charge this utilization fee through an incentive pricing scheme that is contingent on percentages based on past year figures and results. The pricing will use the past year as the basis for pricing the bonus. For instance, if in 2018, the utilization is greater than last year, 10% is charged on the final cost as a bonus for every increase in software usage. In this case, the company will receive $180,000 plus a bonus of 10% of this which is $18,000 bringing a total figure of $198,000. If in 2019, the incentive decreases when compared to 2018, the cost will not factor in the bonus. As such, it will be $180,000 minus the 10% bonus which totals up to $162,000. If in 2019, the cost remains the incentive remains equal to 2018, the bonus will not be applied, and the final figure will remain $180,000.
Reason for Proposing This Scheme for Utilization Bonus
The reason for this is that applying this scheme will mean that XYZ is aiming at being part of a larger organization that gets paid equally and in a similar manner as the employees of said company. By sharing the risks that may arise in the instance where the software does not perform well, XYZ wants to ensure that their service delivery aligns with that of the engine manufacturer. Another reason for choosing this scheme for payment of additional utilization is that the company is confident in the workings of its software and its success. Indeed, the product is the best in the market as of now, and it is important also to show competition as well as potential buyers the confidence that has been placed on a particular product.
Key Performance Indicators for Utilization Increase or Decrease
The best KPI for me is the utilization factor itself. An increase in the utilization is evidence of the software working well whereas a decline denotes a negative attribute of the software. Keeping these indicators in check is important in identifying the additional charges (Ojala, 2016). It looks cheeky using the same issue as an indicator for working out additional charges. It is also important to consider the flight hours per engine to identify the increase in utilization of the software. An increase in usage of the software as described in earlier paragraphs will see an increase in diagnostics. An aircraft cannot fly for long distances regularly without undergoing many diagnostics to ensure that it is in good working condition (Zou, 2014). As such, the key performance indicator is not contingent with the engine manufacturer, but on the final user of the engine. Keeping a tab on these issues will help in identifying the increase in incentives and work out the additional charges.
Pricing Strategy and Model Proposed
I would consider using pricing as a premium strategy. This strategy looks at setting a higher price for a product than the competition. It is the best strategy for gaining maximum profits for an organization (Marburger, 2015). XYZ Company has developed a software that is the best in the market in providing a diagnosis for turbine engines. Indeed, the software designed is better as it provides more accurate information regarding the health of an engine and at a faster time. All these figures are way above the competition's figures. Considering the fact that it offers the best software with the best diagnosis, the price should also be the best in the market.
Indeed, many might be of the view that the pricing strategy will not work; however, the market dynamics tell a different story. It is a known fact that high quality is evidenced by high prices. Everything in the market that is known for its quality is also known to have a higher price (Krishnamurthy, 2010). Perception affects psychology, and the customer or buyer perceives that the product with a higher price tag must be of high quality (Buxmann, Diefenbach, & Hess, 2013). XYZ Company should take advantage of their position and situation in the market and price accordingly. Furthermore, engine diagnosis software is not like purchasing a product off the shelf. If the software has a higher price put against it, it must be for a genuine reason that is denoted by this issue.
Coupled with this strategy is the relationship-establishment pricing strategy that is aimed at creating good relationships with the customer is also important for this case (Zou, 2014). Considering that the price is higher than that of the competition, XYZ Company should then offer a discount that takes back the price to be equal to those of the competition. Say, for instance, the common price for software diagnosis by competition is $180,000, XYZ can quote a price of $200,000 and then offer a 10% discount which will see it reduced to $180,000 per engine per annum. This will be a good gesture for the company which will make them feel welcome as the price is indicative of this. The price is not equal in a bad light because if a customer requires the software, they will still purchase it for $200,000 which is the market price for the software and diagnosis. This will create a good relationship between the two companies.
As suggested in the example, the strategy could also go ahead and implement bonuses that are meant to show the commitment of XYZ Company to working long-term with the organization. The organization indicates that it intends to work exclusively with engine manufacturer (EM). As such, it is proper to implement strategies that are going to support the exclusivity.
In conclusion, XYZ Company is placed in a good position for setting any price they require because of the quality of the product that they have on offer. On the other hand, they are not entering the market to engage customers as they want to enter a business to business (B2B) sort of arrangement with EM that sees them offer diagnosis exclusively using their top of the range software. Utilization and bonuses also should be considered as they form a particular change in doing business for the company. It is, therefore, important to consider all these factors in choosing the pricing strategy and I believe that the strategies put forward are for the best of the organization as they utilize a mix that sees all the issues mentioned are represented.
Buxmann, P., Diefenbach, H., & Hess, T. (2013). The software industry: Economic principles, strategies, perspectives.
Feurer, S., Schuhmacher, M. C., & Kuester, S. (2018). How Pricing Teams Develop Effective Pricing Strategies for New Products. Journal of Product Innovation Management
Krishnamurthy, P. (2010). Pricing Strategies in Indian Software Industry. SSRN Electronic Journal.
Marburger, D. R. (2015). Innovative pricing strategies to increase profits.
Ojala, A. (2016). Adjusting software revenue and pricing strategies in the era of cloud computing. Journal of Systems and Software, 122, 40-51.
Zhang, Z. J. (2005). Pricing strategies. Boston: McGraw-Hill Custom Publishing.
Zou, D. (2014). Intertemporal Pricing of New Products: Incentivizing Consumer Learning and Inertia. SSRN Electronic Journal.
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