2 Group #2 Weston Zloty, , Barbara Levya, Kevin McLamb Saint Leo

2
Group #2
Weston Zloty, , Barbara Levya, Kevin McLamb
Saint Leo University – MBA 565
Team Project – Written Assignment # 4
The Microsoft Surface 8 is the subject of our group’s work. Discover new possibilities with the Pro, designed with professionals like you in mind. Intel EvoTM platform and prepared for the finest of Windows 11, Surface Pro 8 combines the advantages of a laptop and tablet with both mobilities due to its distinctive Kickstand and detachable Keyboard with Slim Pen storage and charging integrated into the keyboard’s design. Incredible things are possible with a larger 13-inch touchscreen with Thunderbolt 4 connectors and more power when required (2022).
Three Major Pricing Objectives
For the latest version of the Surface Pro, we recommend that Microsoft hold two main pricing objectives: first, that they set a price that reflects a target rate of return on investment; and, secondly, that they set a price to garner a particular market share (Peter & Donnelly, 2019). The first objective is essential because previous iterations of this device were meant to be an affordable option for consumers. Because it had a lower price, it also had a less powerful CPU, less memory, a smaller hard-drive, and less capable hardware in general (Hachman, 2021). Microsoft changed all of these things while improving build quality so that its touch and feel were closer to that of the Surface Pro 7’s premium version (Hachman, 2021). But to make these kinds of qualitative changes requires an increase in production costs (Todic et al., 2017). As Peter and Donnelly (2019) assert, for a product to be of value for a firm, it must cover the costs of production, promotion, and distribution while also offering a profit (p. 176). So, while the firm can find some value in recalibrating current promotional resources and using existing distribution logistics, they need to recoup the added cost of production to be profitable.
The second objective should be to capture a new market share. The Surface Pro 8 is a mature product with an existing market share, and it is seeking to grow by updating and challenging new competitors (Peter & Donnelly, 2019). But in raising the price of the base model, Microsoft has probably impacted the ability of that existing consumer base to upgrade their devices. In other words, customers who have had a good experience with the Surface Pro and were perhaps hoping to buy another might not be able to afford the newest generation. For sure, with the schematics and specifications of the Surface Pro 8 as they are, Microsoft has clearly set its sights on entering the premium-tier of the tablet and 2-in-1 market. But with its history as a no-frills, budget-friendly 2-in-1, the Surface Pro has some ground to cover amongst competitors (Hachman, 2021). So, Microsoft should begin by engaging in prestige pricing, which means setting a high price so that customers will perceive quality in the goods sold (Stearns & Borna, 2005). And yet, at the same time, this is a mature product seeking to expand its consumer base, so there should be a certain amount of penetration policy adopted as well, allowing Microsoft to undercut more expensive, more established competitors (Peter & Donnelly, 2019). By adopting these strategies, Microsoft should eventually be able to dominate a new market share, firmly rooting itself amongst premium-tier products.
Final Price
The process of computing the product’s final price involves analyzing the costs involved in introducing the product to the market. The fees will include the cost of marketing, research, technology, and equipment costs for the device’s production (Akan & Tevfik, 2020). A cost-plus pricing strategy will be used for the pricing of the item, which means that the final price of the product is set higher than the costs incurred in the production because the products need to make profits. The following steps were used to determine the final price for the Microsoft Surface 8 pro.
Step 1: Estimate the costs that will be incurred in the production of the laptop.
The first step in setting the price was creating an estimate for the costs that will be incurred which include:
Particulars
Cost per unit
Labor
$100
Materials
$200
Overhead
$250
Fixed costs
$100
Total costs
$650
The costs include the variable costs, and the fixed costs that will be incurred include the labor costs, which refer to the expenses incurred in paying the staff involved in manufacturing the product. The materials include various materials that are needed for the manufacture of the device (Schoenmaker & Schramade, 2018). One material required is the laptop’s software and hardware components to ensure that the laptop is handy. The overhead costs are the utilities, rent, insurance, supplies, advertising, and other costs incurred in the production process (Martin et al., 2020). The fixed costs are the costs that do not change with the units of production.
Step 2: Estimation of the expected profit margin
The appropriate profit margin for the laptop sale is 25%, whereas, for each of the laptops that will be sold, a 25% profit will be realized.
Step 3: Calculating the final price
Since a cost-plus strategy is used then the final price will be the costs incurred plus the profit margin which will be:
125% of $650= 125/100*650
= $812.5
The final price for selling the Microsoft Surface 8 Pro is $812.5. The costs of the device’s production are subject to inflation or deflation, and hence the product is expected to be $800- $1200 per unit because there are higher chances of the costs going up.
Projection of Costs & Profits
Microsoft had some pretty high expectations for the Surface Pro when the Surface Pro 8 came out. Unfortunately, this year’s generation of the Surface Pro had a sharp decline of 17% compared to last year. However, this was expected as during the FY21 Q4 earnings call Microsoft gave guidance noting it expected “reduced revenue in the low teens” (Rubino, 2021). However, 17% is the high teens, suggesting the impact due to ongoing supply chain issues was more significant than anticipated. Incidentally, Microsoft stopped reporting actual Surface revenue in dollar amounts. Instead, it is only revealing percent changes in Surface income. (Rubino, 2021).
Microsoft is in a precarious position for component supply for its Surface business. It only makes small chip orders through Intel and AMD putting it at the bottom of the list compared to the big three (Lenovo, Dell, and HP), prioritizing bulk orders with larger contracts. Microsoft can turn this around however since the Surface Pro 8 were just released not too long ago and it has been stated that Surface Pro 8 has so much more potential than its predecessors and even the competition. (Rubino, 2021).
Microsoft went up in revenue by 10% compared to last year. The chip shortage is the reason why profits were not higher. In time the shipping lanes will clear up and the profits for Microsoft and more specifically the Surface Pro 8 will exceed expectations. (Rubino, 2021).
Expected Revenue
Table 1
Note: Expected Revenue by month with a 4.5% growth value per month, with $812.50 unit price starting with a volume of 5000 units the first month.
Table 2
Expected Revenue
Months
Revenue
Volume (Units Sold)
January
$4,062,500
5000
February
$4,245,313
5225
March
$4,436,352
5460
April
$4,635,987
5706
May
$4,844,607
5963
June
$5,062,614
6231
July
$5,290,432
6511
August
$5,528,501
6804
September
$5,777,284
7111
November
$6,037,262
7430
December
$6,308,938
7765
Table 3
Note: Third and fourth year quarterly forecast.
Table 4
Quarters
Revenue
Q1
$20,681,905
Q2
$23,601,490
Q3
$26,933,221
Q4
$30,735,279
Q1
$35,074,059
Q2
$40,025,329
Q3
$45,675,549
Q4
$52,123,389
Conclusion
In conclusion, our product is the Microsoft Surface Pro Eight. There are pricing objectives that are crucial to marketing this product. First, we need to make sure that a price is set to bring a proper return on the investment and increase share prices for shareholders. (Peter & Donnelly, 2019). This product is an entirely new concept, bringing about a new market that we are targeting, so we seek to challenge the competition, such as Apple or Samsung.
Our team has focused on changes with this iteration of the two-in-one laptop, and we made sure to learn from previous iterations about mistakes to not make regarding pricing and quality.
The final price that our team decided to sell this product at is eight hundred twelve dollars and fifty cents. This reflects a twenty-five percent profit margin that we will garnish for the volume of products sold. The primary strategy used to obtain this exact price involved factoring in fixed and variable costs and inflation. Therefore, the range of this product was decided to be eight hundred to twelve hundred dollars per unit.
The most significant issue we are facing is the problems with the supply chain, but we remain optimistic about the ROI of this product. Using statistical analysis, we projected that our product would increase monthly volume by four and a half percent. By the end of the year, this makes the yearly revenue at around five and a quarter million. The following annual quarters are expected to increase ten million with a linear upward trend.
References
Akan, M., & Tevfik, A. T. (2020). Fundamentals of finance. In Fundamentals of Finance. De
applications. Prentice-Hall.
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Hachman, M. (2021, October 13). Microsoft Surface Pro 8 review: A superior Windows 11 tablet. PC World. https://www.pcworld.com/article/538941/microsoft-surface-pro-8-review.html
Martin, J. D., Keown, A. J., & Titman, S. (2020). Financial management: principles and
Peter, J. Paul and Donnelly Jr., James H. (2019). A preface to marketing management (15th ed.). McGraw-Hill Education, New York, NY.
Rubino, D. (2021, October 26). Surface Rev is down, while Windows Rev is up as the chip shortage continues. Windows Central. Retrieved February 25, 2022, from https://www.windowscentral.com/microsoft-surface-rev-drops-17-while-windows-fy22-q1-10-chip-shortage-continues-impact
Schoenmaker, D., & Schramade, W. (2018). Principles of sustainable finance. Oxford
Stearns, J. M., & Borna, S. (2005). Beyond Prestige Pricing: Coverage of Counter-Intuitive Demand in Marketing Education. Marketing Education Review, 15(3), 65–71. https://doi-org.saintleo.idm.oclc.org/10.1080/10528008.2005.11488924
Todic, V., Cosic, I., Maksimovic, R., Tasic, N., & Radakovic, N. (2017). Model for Simulation of Life Cycle Costs at the Stage of Product Development. International Journal of Simulation Modelling (IJSIMM), 16(1), 108–120. https://doi-org.saintleo.idm.oclc.org/10.2507/IJSIMM16(1)9.373
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