FSI Inc. Justin Woo woke to the shrill sound of his alarm clock. It was 4:30 am, and it took him a moment to remember why he had set the alarm this early. Justin had to catch an early morning Amtrak train out of the Oakland railway station to make a presentation to the managers of the Lush Valley Vineyard in the Napa Valley. A lot was at stake, for Justin (26) and his older brother Sam (32) had invested a few years developing their product. This would be their first major presentation to a potential customer. Further, both Sam and Justin had recently quit their day jobs to work on this business full-time. Justin and Sam Woo were the brains behind the four-employee Farm Solutions Inc. (FSI). While Justin handled marketing and financial matters, Sam took care of the technical aspects including product design, interfacing with overseas manufacturers etc. A technical assistant and an office assistant (Sam's wife) completed the FSI team.

The product that Justin was to showcase later that day at Napa (and indeed the only product that FSI had that was ready-to-market) was the Agro Remote Management System (ARMS). As Justin knotted his necktie, he mentally reviewed the ARMS package that he would be suggesting to the folks at the 120-acre Lush Valley Vineyard. That system would include 1,200 battery powered wireless remote sensors (called motes, each the size of a matchbox) embedded in the soil at regular intervals all over the vineyard, each of which would transmit quarter hourly updates of critical soil and atmospheric data (soil acidity level, concentrations of various essential nutrients in the soil, soil and atmospheric moisture and temperature etc.) to one of 12 solar powered repeater stations (each the size of a shoebox), and from there the data would be sent to a central computer station. The data from the numerous motes could then be used to automatically adjust the delivery of water and fertilizer to grape vines in each one of the almost 240 pre-existing sprinkler zones in the Lush Valley Vineyard. Such automated customization of water and fertilizer delivery could result in much savings to the vineyard owners. Grape vines used to produce premium wines are very temperamental plants that require their environments to be controlled very precisely. Too much or too little of water and nutrients would result in 'standard quality' grapes that are only suitable for low grade wines. The standard quality grapes fetch a substantially lower price ($305 per ton) compared to what the premium grapes command ($520 per ton). Since vineyards are typically located on land with an undulating terrain with many widely different microclimates, viticulturists are forced to customize water and nutrient delivery to the various zones in a vineyard. Prior to the ARMS approach, farmers had to use educated guesses and other low-tech means of determining how much of water and nutrients was required in each zone. Such low-tech techniques were not only labor intensive, but also were not very precise.

The automated ARMS system would remove all guess work and substantially reduce the need for human intervention in the adjustment of water and nutrient delivery. Farmers using the ARMS system could also expect cost savings arising from the reduction in unnecessary distribution of water and fertilizer. With California now facing another drought and the cost of irrigation water having increased to $4.80 per 1000 gallons (including the cost of pumping, maintenance of irrigation canals etc) and fertilizer costs averaging $972 per ton (including the cost of delivery; a ton is 2000 lbs), farmers would greatly benefit from substantial reductions in water and fertilizer usage. The Woo brothers had the ARMS system field tested in a test vineyard.

The annual yield from the 10-acre ARMS plot was 91 tons of premium grapes and 31 tons of standard quality grapes. A 10-acre control plot using the existing technology yielded 80 tons of premium grapes and 35 tons of standard quality grapes. Vineyards contracted with soil technicians (who worked as independent contractors) whose responsibilities included studying the micro-climates and soil samples to determine the exact watering and fertilizer needs for each part of a vineyard. Vineyards paid the soil technicians by the hour. Dr. Al Cohol, Director of CUVRC estimated that vineyard owners currently needed one full time soil technician (working 40 hours a week) for every 50 acres of cultivated land. Each of these technicians were paid $54,000 per year. Since most vineyards were in close proximity to each other, smaller vineyards sometimes shared the services (and the cost) of soil technicians such that each soil technician serviced approximately 50 acres of cultivated land. Industry regulations limited soil technicians to just 40 hours of work each week. Dr. Cohol noted in his report that by automating the process of determining water and nutrient requirements, the vineyard owners could reduce the number of soil technicians to one every 70 acres of cultivated land. Based on his testing and his extensive knowledge of the viticulture industry, Dr. Cohol estimated that the ARMS system would save Napa Valley vineyards an average of 19.5 gallons of water per acre per watering day, and 12.8 lbs of fertilizer per acre per year. Dr. Cohol estimated that west coast vineyards were watered 148 days in the year.

In a recent article that was published in The Grapevine, Dr. Cohol had calculated that the average west coast vineyard made an annual net profit before tax of approximately $1,000 per acre (using current technologies - i.e. not ARMS). Motes are designed to be manually installed in the ground at a depth of 6 inches using a prod supplied by FSI. This prod would ensure that the mote was located at the correct depth and that its antenna was extended 2" above ground level. Farmers would be supplied one free prod for every 100 motes purchased. To ensure adequate coverage and sufficient redundancy, FSI recommends the use of 10 motes for each acre of cultivated land. The motes (which are powered by long lasting non-toxic lithium batteries) have to be replaced every two years, along with the repeaters. Prolonged exposure to moisture and fertilizers causes the hermetically sealed body of the motes and the repeaters to become irreparably corroded. Motes (each of which has a unique address) communicate with the repeaters using wireless (WiFi) connections. Each wireless repeater can handle roughly 100 motes. Farmers would receive one free wireless repeater for every 100 motes purchased. FSI estimates that the cost of labor to vineyard owners for installing and setting up motes and repeaters averages to $18.00 per mote (not including the price of the motes). This cost of installing the motes and repeaters is not part of the pricing of the ARMS system. As mentioned earlier, this labor cost will recur every two years when the motes and repeaters are replaced, and will be paid by the vineyard owners. In addition to the motes and the repeaters, every vineyard using the ARMS system would require one customized computer that will receive the signals from the repeaters and interface with the pre-existing sprinkler systems. This computer, associated hardware and software would be supplied by FSI. Because of the rapid change in computer technology, and the harsh environmental conditions in a typical vineyard, farmers would have to buy new computer systems from FSI every two years - at the same time they replace the motes and repeaters. The motes, repeaters, prods and other hardware had been designed by Sam Woo and he had signed a contract with an offshore manufacturer - See Li Man Pvt. Ltd. of Taiwan. See Li Man would exclusively supply motes to FSI at a price of $81.00 per box of a dozen motes, repeaters at a price of $212.00 per repeater, and prods at $4.50 per unit. They would also supply FSI with the ruggedized computer systems suitable for industrial use (with interfacing hardware and software) at a price of $2,630 per system. The computer system and interfacing hardware and software can handle an unlimited number of repeaters and motes. The prices quoted by the offshore supplier are inclusive of all shipping costs, taxes and duties. Justin Woo had researched the grape industry and found that while there were vineyards in many parts of the country, California accounted for the biggest market - by far. He knew that the state had 50 large vineyards (100 acres and above) with an average size of 140 acres; 100 medium sized vineyards (40 to 100 acres) with an average size of 80 acres; and 160 small vineyards (10 to 40 acres) with an average size of 20 acres. Many of the smaller vineyards were owned by individuals while the larger farms were owned by professionally managed corporations. Sam and Justin had decided that they would not be interested in any order for systems with less than 400 motes. As he boarded the train, his mind kept returning to the topic that he and Sam had debated the previous night.

How should ARMS be priced? The Woo brothers had already decided that the pricing for the computer system (including software and interfacing hardware) should be set at $3,300. As for the perishables (motes, repeaters and prods), the FSI brothers felt that the pricing should be all inclusive (i.e. should include the price of motes, repeaters and prods) and that the price quotes should be on a per mote basis regardless of the size of the order. That is, FSI would determine a price for the perishables on a per mote basis assuming one repeater and prod for every 100 motes. They were, however, not able to agree upon a specific price per mote. Justin was hoping that FSI Inc could make a profit of $300,000 each year in the first two years. This would allow them the financial freedom to modify their product and technology to suit other agricultural crops, including other fruits, grains etc. Justin estimated that FSI's head office expenditure would be $540,000 in the coming year including the salaries and benefits for all existing employees, rent, utilities and travel expenses. Justin estimated that he could personally visit only about a third of the large and medium vineyards a year to make sales presentations and follow-up calls. To reach more vineyards, Justin knew that he would have to hire a salesperson at a cost of $90,000 per year including benefits, incentives, and travel expenses. This sales person would be able to service approximately 100 vineyards a year. Justin knew that while word-of-mouth would be his most important communication tool, he would still have to spend some money on other promotions. He planned to spend $25,000 per year on trade shows and $45,000 per year on advertising in the newsletters of the California Viticulture Association and other such media. Based on what Dr. Cohol had mentioned a few days earlier, Justin knew that he could expect to gain roughly 10 - 30% penetration of the California market of large and medium vineyards in the first year depending on the pricing of the ARMS system.

Case Questions: 1. Calculate the profit increase for the vineyard owners (on a per acre basis) from using the ARMS system - but before factoring in the cost of the ARMS system. (35%)

2. Calculate the cost to FSI Inc. (on a per acre basis) of supplying motes, repeaters, and prods to vineyard owners. (25%)

3. At what price per mote would FSI be able to make $300,000 in profits in the first year with 10%, 20% and 30% penetration of the California market? (20%)

4. Based on the above analyses, and other factors you may find pertinent, what pricing structure (per mote) would you recommend for the ARMS system? As stated in the case, the price of the computer system, interfacing hardware and the software have already been set. (20%) Instructions:

1. In doing Q1 (farmers' savings), calculate savings on a per acre basis. Calculate the savings per acre of using the ARMS system, but without factoring in the cost to the farmer of the ARMS system (since that is established in a later question).

This savings to the farmer establishes the upper end of the possible pricing of ARMS systems. 2. For Q2, to compute FSI's cost, all you need to do is establish FSI's cost per acre of motes, repeaters, and prods. 3. In doing Q3 and Q4, it is best if you calculate the total number of acres penetrated in the target market, and then figure out how many motes, repeaters, prods etc., are needed and then proceed from there. Finally the price of motes has to be expressed on a per mote basis. You may assume that all farms have acreage in multiples of 10 acres.