In July $2006,$ Thomas Zimmermann, manager of the European Sales Division of Computron, was trying to decide what price to submit on his bid to sell a Computron $1000$X digital computer to K$$nig & Cie., AG$,$ Germanys largest chemical company. If Zimmermann followed Computrons standard pricing policy of adding a $331/3\%$ markup to factory costs and then including transportation costs and import duty, his bid would amount to $$1,244,800$; he feared, however that this would not be low enough to win the contract for Computron.K$$nig had invited four other computer manufacturers to submit bids for the contract. A reliable trade source in Zimmermanns opinion indicated that at least one of these competitors was planning to name a price in the neighborhood of $$872,000.$ This would make Computrons normal price of$$1,244,800$ higher by $$372,800,$ or approximately $43\%.$ In conversations he had had with K$$nigs vice president in charge of purchasing, Zimmermann was led to believe that Computron would have a chance of winning the contract only if its bid was no more than $20\%$ higher than the lowest bid.Since K$$nig was Computrons most important German customer, Zimmermann was particularly concerned over this contract and was wondering what strategy to employ in pricing his bid.Background on Computron and Its ProductsComputron was an American firm that had, in the winter of $2002,$ opened a European sales office in Paris with Thomas Zimmermann as its manager. The companys main product, both in the United States and Europe, was the $1000$X computer, a medium$-$sized digital computer designed specifically for process control applications.From $2002$ to $2005,$ the market for digital process control computers kept growing rapidly. These computers were substantially different from those used for data processing and engineering calculation. They were generally produced by specialized companies, not by the manufacturers of office and$/$or calculation$-$oriented digital computers. These companies also were different from those that produced analog process control computers $($the units traditionally used for process control$).$Digital computers were classed as small, medium, or large, depending on their size, complexity, and cost. Small computers sold in the price range up to $$320,000,$ medium computers from $$320,000$ to $$2\mathrm{.}4$ million, and large computers from $$4$ million to $$24$ million.The Computron $1000$X was designed specifically for process control applications. It was used in chemical and other process industries $($oil refining, pulp and paper, food manufacture, and so on$)$ as well as in power plants, particularly those for nuclear power.In addition to its $1000$X computer, Computron manufactured a small line of accessory process control computer equipment. This, however, constituted a relatively insignificant share of the companys overall sales volume.During its first six months the European sales office did only about $$4,400,000$ worth of business. In the $2005-2006$ fiscal year, however, sales increased sharply, totaling $$20,000,000$ for the year$\mathrm{.}1$ Computrons total worldwide sales that year were roughly $$176,000,000.$ Of the European countries, Germany constituted one of Computrons most important markets, having contributed $$4,800,000,$ or $24\%,$ of the European sales total in $2005-2006.$ England and Sweden were also important, having contributed $22\%$ and $18\%$ respectively. The remaining $36\%$ of sales was spread throughout the rest of Europe.Computron computers sold to European customers were manufactured and assembled in the United States and shipped to Europe for installation. Because of their external manufacture these computers were subject to an import duty, which varied from country to country. The German tariff on computers of the type was $17(1)/(2)\%$ of the U$.$S$.$ sales price.Prompted primarily by a desire to reduce this import duty, Computron began constructing a plant in Frankfurt. It would serve all $15$ countries in the European Community and was scheduled to open September $15,2006.$ Initially it was to be used only for assembly of $1000$X computers. This would lower the German import duty to $15\%.$ Ultimately the company planned to use the plant to fabricate component parts as well. Computers completely manufactured in Germany would be entirely free from import duty.The new plant was to occupy $10,000$ square feet and employ $20$ to $30$ people in the first year. Its initial yearly overhead was expected to be approximately $$1,200,000.$ As of July $2006$ the European sales office had no contracts on which the new plant could begin work, although training of employees and the assembly and installation of a pilot model $1000$X computer could keep the plant busy for two or three months after it opened. Zimmermann was somewhat concerned about the possibility that the new plant might have to sit idle after these first two or three months unless Computron could win the K$$nig contract.Company Pricing PolicyComputron had always concentrated on being the quality, blue$-$chip company in its segment of the digital computer industry. The company prided itself on manufacturing what it considered the best all$-$around computer of its kind in terms of precision, dependability, flexibility, and ease of operation$\mathrm{.}1$ Computrons fiscal year was July $1$ to June $30.$Computron did not try to sell the $1000$X on the basis of price. Its price was very often higher than that for competing equipment. In spite of this, the superior quality of Computrons computers had, to date, enabled the company to compete successfully both in the United States and Europe.The European price for the $1000$X computer was normally figured as follows:U$.$S$.$ cost $($includes factory cost and factory overhead$)+$Markup of $331/3\%$ on cost $($covers profit, R&D allowances, and selling expenses$)+$Transportation and installation costs$+$Import dutyTotal European pricePrices calculated by this method tended to vary slightly because of country$-$to$-$country differences in tariffs and differences in components between specific computers$\mathrm{.}2$ For the K$$nig application, Zimmermann had calculated that the normal price for the $1000$X computer would be $$1,244,800$:Table ABreakdown of Computer CostsFactory cost$ $768,000331/3\%$ markup on cost $256,000$Quoted U$.$S$.$ price$$1,024,000$Import duty $(15\%$ of Quoted U$.$S$.$ price$)153,600$Transportation and installation $67,200$Total normal price$$1,244,800$The $331/3\%$ markup on cost was designed to provide a before$-$tax profit margin of $11\%$ of the quoted U$.$S$.$ price, an R&D allowance of $8\%,$ and a selling and administrative expense allowance of $6\%.$ The stated policy of top management was clearly against cutting this markup to obtain sales. Management felt that cutting prices not only reduced profits, but also reflected unfavorably on the companys quality image. Zimmermann knew that Computrons president was especially eager not to cut prices at this particular moment, because Computrons overall profit before taxes had been only $6\%$ of sales in $20052006,$ compared with $17\%$ in $20042005.$ Consequently, the president had stated that not only did he want to maintain the $331/3\%$ markup on cost$,$ but he was eager to raise it$.$In spite of this policy, Zimmermann was aware of a few isolated instances when the markup had been dropped to the neighborhood of $25\%$ to obtain important orders in the United States. In fact, he was aware of one instance when the markup had been cut to $20\%.$ In the European market, however, Computron had never yet deviated from a $331/3\%$ markup on cost$.$The CustomerK$$nig & Cie., AG$,$ was the largest manufacturer and processor of basic chemicals and chemical products in West Germany. It operated a number of chemical plants throughout the country. To$2$ Depending on the specific application, the components of the $1000$X varied slightly, so each machine was somewhat different.date it had purchased three digital computer process control systems, all from Computron. The purchase was made during $2005-2006$ and represented $$4,000,000$ worth of business for Computron. Thus K$$nig was Computrons largest German customer and alone constituted over $80\%$ of Computrons $20052006$ sales to Germany.Zimmermann felt that the primary reason K$$nig had purchased Computron systems was their proven reputation for flexibility, accuracy, and overall high quality. So far, K$$nig officials seemed well pleased with their Computron computers.Looking ahead, Zimmermann felt that K$$nig would continue to represent more potential business than any other single German customer. He estimated that during the next year or two K$$nig would need another $$4,000,000$ worth of digital computer equipment.The computer on which K$$nig was then inviting bids was to be used in training operators for a new chemical plant. The training program was to last approximately four to five years, after which the computer would either be scrapped or converted for other uses. The calculations the computer would have to perform were highly specialized and would require little machine flexibility. In the specifications published with the invitations to bid, K$$nig management had stated that it was primarily interested in dependability and a reasonable price. Machine flexibility and pinpoint accuracy were of very minor importance, because the machine was not to be used for on$-$line process control.CompetitionIn Germany approximately nine companies were competing with Computron in the sale of medium$-$priced digital process control computers. Four companies accounted for $80\%$ of sales in $20052006($see Table B$).$Table BMarket Shares for Companies Selling Medium$-$Priced Digital Computers to the German Market, $20052006$Computron, Inc.$ $4,800,00030\mathrm{.}0\%$Ruhr Maschinenfabrik, AG$3,200,00020\mathrm{.}0$Elektronische Datenverarbeitungsanlagen, AG$2,000,00012\mathrm{.}5$Digitex, GmbH$2,800,00017\mathrm{.}5$Six other companies $($combined$)3,200,00020\mathrm{.}0$Total$$16,000,000100\mathrm{.}0\%$Zimmermann was primarily concerned with competition from the following companies:Ruhr Maschinenfabrik, AG: a very aggressive German company which was trying hard to expand its share of the market. Ruhr sold a medium$-$quality, general$-$purpose digital computer at a price roughly $221/2\%$ lower than Computron charged for its $1000$X computer. Because the Ruhr machine was manufactured entirely in Germany, the absence of import duty accounted for $171/2\%$ of this price differential. To date Ruhr had sold only general$-$purpose computers, but reliable trade sources indicated that it was then developing a special computer for the K$$nig bid. Ruhrs planned price for the special$-$purpose computer was reported to be about $$872,000.$Elektronische Datenverarbeitungsanlagen, AG $($EDAG$)$: a relatively new company which had developed a general$-$purpose computer of comparable quality to the Computron $1000$X$.$ Zimmermann felt that EDAG presented a real long$-$range threat to Computrons position as the blue chip company in the industry. To get a foothold, this firm had sold its first computer almost at cost$.$ Since that time, however, it had undersold Computron only by the amount of the import duty to which Computrons computers were subject.Digitex, GmbH: a subsidiary of an American firm which had complete manufacturing facilities in Germany and produced a wide line of computer equipment. The Digitex computer that competed with the Computron $1000$X was only of fair quality. Digitex often engaged in price$-$cutting tactics, and in the past the price of its computer had sometimes been as much as $50\%$ lower than that of Computrons $1000$X$.$ In spite of this difference, Computron had usually competed successfully against Digitex because of technical superiority.Zimmermann was not overly concerned about the remaining competitors; he did not consider them to be significant factors in Computrons segment of the industry.The German MarketThe total estimated German market for medium$-$priced digital process control computers of the type manufactured by Computron was running at about $$16,000,000$ per year. Zimmermann thought this could be expected to increase at an annual rate of about $25\%$ for the next several years. For $2005-2006$ he already had positive knowledge of about $$5,200,000$ worth of new business, broken down as follows:Table CBreakdown of New BusinessK$$nig & Cie., AGFrankfurt plant$$1,200,000$D$$sseldorf plant$1,000,000$Mannheim plant$600,000$Central German Power Commission$1,760,000$Deutsche Autowerke $640,000$$$5,200,000$This business was in addition to the possible computer sale to K$$nig; however, none of this already known business was expected to materialize until late spring or early summer.Deadline for bidsThe deadline for submission of bids to K$$nig was August $1,2006$then less than two weeks away.According to the above article, What strategy Zimmermann should apply in pricing his bid?