To: Deere & Company Senior Management TeamFrom: Robert GerstenbergerDate: November 15, 2010Subject: Deere & Company Pricing Strategy for Launch of JD 750

This memo recommends a pricing strategy of pure parity for the launch of the JD 750 Bulldozer, one of Deere & Company’s most audacious ventures yet. Because this product launch addresses a market space in which Deere is not a dominant player, this strategy aims to provide incentives to industrial customers and existing Deere dealers to embrace a new technology. By launching this pricing scheme through an aggressive $300k promotional campaign, Deere & Company may expect to earn line profits of $45M, and establish itself as a major player in a new lucrative market segment.

BackgroundDeere has an established reputation for quality in the small crawler tractor market

segment, and has built considerable brand loyalty among this purchasing group, along with more than 50% market share. Deere has not, however, enjoyed this significant level of share in the heavy construction industry and has never offered a product as large as the new JD 750.

Over the past 10 years, we have invested nearly $70M in development and production for this innovative new line, and are ready to begin promoting the JD 750. We have received a promotional budget of $300k, and must decide on the price to communicate to our dealers.

RecommendationsI recommend that Deere & Company price the JD 750 at the same market price as the Cat

D5 product. By pricing at parity and focusing our advertising on the superior performance and standard higher quality feature set of our JD 750 in comparison to the Cat D5, we can capture market share and bring in an estimated $45M in line profits.

Basis for RecommendationsFinancial analysis of projected revenues and market shares from the three pricing options

shown in Exhibit 1 indicate that from a purely financial position, pricing at parity results in the most profitable outcome by a small 1% margin over pricing below. It is possible that by pricing below we could earn more market share than our current projections. However, such a pricing scheme could damage Deere’s brand identity as a quality player instead of a value player. Accordingly, we feel that pricing at parity and protecting the brand is the best strategy.

Additionally, major construction customers are less sensitive to the initial price than our smaller crawler customers. In this new space, reliability, features and parts availability are the driving factors behind purchasing decisions. By pricing at Cat D5 levels, we will be focusing buyers’ attention on our improved drive train, superior standard set of included features and productivity increases of 10-15%, all of which are superior to the Cat D5.

Finally, we project Deere to break even in the middle of our 2nd year on the market after selling 3,425 units. This is the earliest of the 3 potential strategies.

Next StepsImmediately launch the $300k marketing blitz to all dealers and consumers in the large

contractor market with an emphasis on the lower price per horsepower and standard, higher quality feature set in comparison to its competitor in this space, the Cat D5. Emphasize that operators can expect to achieve a 10-15% increase in productivity with the JD 750 for the same price as they would pay for the D-5.

Exhibit 1 – Options Matrix

Option 1 Option 2 Option 3Description of Option

Price JD 750 slightly (5%) below Cat D5 price levels, maintain standard JD pricing on parts, dealer discounts. Communicate combination of lower price and increased value based on greater inclusion of features, superior horsepower (can use $/HP as well), and higher productivity of 10-15%. “Reduce costs from day 1”. Emphasize commonality of parts to existing products to influence large contractors, whose purchase decisions are heavily influenced by parts availability.

Price JD 750 at Parity with Cat D5, maintain standard JD pricing on parts, dealer discounts. Communicate increased value based on greater inclusion of features in base price, superior horsepower (can use $/HP as well), and higher productivity of 10-15%. Emphasize commonality of parts to existing products to influence large contractors, whose purchase decisions are heavily influenced by parts availability.

Price JD 750 above Cat D5, maintain standard JD pricing on parts, dealer discounts. Communicate increased value based on greater inclusion of features in base price, superior horsepower (can use $/HP as well), and higher productivity of 10-15%. Emphasize commonality of parts to existing products to influence large contractors, whose purchase decisions are heavily influenced by parts availability.

Overall Assessment

Strategy is to quickly gain market share by under-pricing with a higher quality product. Expected improvements in production efficiencies will eventually lower costs of hydrostatic transmission production below that of a standard transmission. Due to significant competition from aftermarket parts manufactures, there is no opportunity to increase parts pricing to offset the lower margin.

Deere Crawlers have typically been priced comparably with lower performance, lower horsepower competitor offerings. Introducing the JD 750 priced at parity will need less explanation, but potentially leaves money on the table from less price-sensitive customers. This strategy will increase Deere’s market share in this space, while maintaining brand equity by not

Deere’s primary sales channel is through dealers, who prefer to sell higher margin products if possible. Offering the JD 750 at a higher price will serve as an increased incentive for them to replace lower-margin units with higher gross margin products like the JD 750.

Additionally, even at this higher point, the JD 750 is cheaper per HP than the Cat D5, and cheaper overall with matching feature

underpricing. sets.Strategic Fit (Core Competencies)

This strategy would be a poor fit with Deere’s traditional pricing practices.

This fits with Deere’s, and indeed the industry’s historical approach to smaller tractors, to set a margin target for the base unit and price additional features and options. Deere however has consistently offered more features than competitors in the same space, giving it excellent margin but potentially leaving some price on the table.

Deere has always offered more features as part of the base product offering, and priced similarly to competition. By continuing to offer greater features, and adding innovation and reliability, Deere can still price lower per horsepower, but command a higher up-front price based on this increased value.

While smaller horsepower-level customers are more concerned with initial price, larger industrial customers (potential 750 customers) base buying decisions on quality, parts and reliability, and are willing to pay more up front.

Financial Attractiveness

Deere estimates the total market for JD 750 sized crawlers to be 5,500 units per year.

If Deere prices the JD 750 slightly (5%) below the Cat D5, we estimate that it may take as much as 45% of the market share. With an estimated standard cost of $36,110, a 45% market share will earn JD $44.6M annually. Deere will break even after selling 3,885

If Deere decides to pursue a parity pricing scheme, we believe they will take a 40% market share in that space, since they are currently a weak player and must break customers’ existing brand loyalty to established players like Cat.

With an estimated standard cost of $36,110, a 40% market share will earn JD $45.0M

If Deere prices the JD 750 slightly (5%) above parity with the D-5, we estimate that it will take only a 30% market share, as it will be difficult to unseat the more established Cat brand without being price-competitive. We estimate this strategy will earn Deere a profit of $37.7M annually. Deere will break even after selling 3,062 units, which is expected to occur in the

units, which is expected to occur towards the end of Year 2.

annually. Deere will break even after selling 3,425 units, which is expected to occur in the middle of Year 2.

second half of Year 2.

Noteworthy Risks

• Pricing below the market price for the Cat D5 may damage the John Deere brand by eroding its image as a quality player and inserting value-centered perceptions.

• Lower base price anchors parts prices at industry expected 65% of purchase price for first three years.

• Very few add-on options above standard base product, cannot rely on additional revenue.

• Lower base price anchors parts prices at industry expected 65% of purchase price for first three years.

• Higher offering price will need justification through sales calls, advertising, and nearly all marketing channels.

• Price separation may create confusion among dealers (some products priced competitively, some priced higher).

• More difficult to draw market share from established Cat D5 and lower priced Case 1150B.

Exhibit 2 – Financial Analysis

Pricing strategy vs CAT 5 % Above At 5% Below

Estimated Mkt share based on pricing strategy 30% 40% 45%

CAT has 50-60% of large tractor market

CAT Standard

Gross $ 61,117 100% 59,875

Net $ 48,422 75.39% 45,138

50,843

48,422

46,001

Cost -80% (36,110)

(36,110)

(36,110)

(36,110)

CM 9,028

14,733

12,312

9,891

Parts CM at 90% of standard 8,125

8,125

8,125

8,125

Total CM 17,153

22,858

20,437

18,016

# of Units Sold by JD out of 5,500 Total Mkt

1,650

2,200

2,475

Total Profit 37,715,86

5 44,961,40

0 44,589,35

3

Break-Even Analysis

Engineering Cost 20,000,000

Capital Expenditures 50,000,000 70,000,000

# of Units Sold To Break Even 3,06

2 3,42

5 3,88

5

Exhibit 3 – Market Share