Company Overview and Its Major Products
Boeing is a U.S based company that designs, manufactures and sells airplanes and airplane parts. The company that was founded in 1916 is based on Chicago, Illinois. The company has since grown into world leading aerospace company with operations spread in over 150 countries in the world (Boeing, 2018). The company’s product portfolio includes military and commercial aircraft, weapons, electronic and defense systems, satellites, advanced information and communication technologies and launch systems among others. For the purpose of completion of this paper, the pricing model for the company Boeing 502 small satellite will be discussed.
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Strategic Implications to be Considered when Setting Prices
A firm must consider the strategic implications when setting prices for its products in the market. According to (Fisher & Waschik, 2002) one of the strategic implications when setting prices is the market competitors. Boeing faces stiff competition in defense, space and security market segment from companies such as SpaceX, Northrop Grumman and Raytheon Company within the U.S market and BAE systems outside the United States. In setting prices for its satellites, Boeing must consider how these companies would react to their pricing model. This has strategic implications since such companies may choose to react in a way that would affect their market penetration and bottom line. For example, reducing prices to increase sales may lead to price reductions from its competitors affecting overseas market segments.
The other strategic implication to be considered when setting market price is demand and the required margins. According to (Melewar & Gupta, 2017) depending on chosen position strategy, margins have to be decided. However, these differ depending on product demand, the choice of distributions channels and across countries (pp. 50). Hence setting of market price of a commodity must make a consideration market demands and margins to be attained. This should take into considerations the demand, impact of geographical differences and distribution strategy that would be adopted for such a product.
In addition to competitors, demand and margins, the other strategic implications that must be considered when setting prices of a commodity are the cost implications (Melewar & Gupta, 2017). Companies incur different costs in the manufacture and distribution of their products. Some of the costs associated with product manufacture are fixed and variable costs. In addition to the variable costs, there are distribution costs, entry costs and marketing costs. Distribution and entry costs are critical for a company such as Boeing whose products target customers beyond the confines of the United States. Entry costs related to tariffs and taxes levied by the importing company have an influence on the product pricing. Moreover, business treaties that exist between countries vary and may serve to increase the price of a commodity thus affecting the pricing of commodities.
The Pricing Model that Boeing must use in setting Price for its Boeing 502 Satellite
The selection of product pricing can be done based on several approaches. According to (Verma, 2008; Hill, 2013) there are three major approaches to price determination of products namely market-based or customer-based approach, the cost-based approach and the competition-based pricing. The cost-based pricing model involves the calculation of the cost of product production and addition of a certain margin percentage that is intended to be achieved in the market. Instead of the focus on costs, the customer-based approach focuses on the potential of value to be achieved by the customer. According to (Hill, 2013) customer-based pricing involves setting product price based on perceived value that customers can derive from the product. Based on the two pricing approaches provided, cost-based approach to pricing should be chosen by Boeing in determining the price of its small satellites.
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The Rationale behind the Choice of Cost-Based Pricing Approach
Although cost-based pricing model has its own limitations, it is its advantages that makes it ideal for pricing of Boeing small satellites over the market-based approach. The rationale behind the choice of cost-based approach over the market-based pricing approach is its simplicity, its needs little information and is easy to administer. The market based approach relies on determination of consumer perception of value in price determination. However, (Verma, 2008) notes that the accurate determination of consumer perception of value is a complex process. In contrast, Hill (2013) points that cost-based approach to pricing is easy to create since it involves already known variables. Moreover, the use of cost-based approach is easy to administer as it is less involving and requires little information to create the price.
The Costs to be Considered in Setting the Price of Small Satellites
The design, manufacture and launching of satellites requires considerable resources in terms of human and financial capital. Satellites vary on the basis of the size and the load it can carry with it to the space. The cost of design, manufacture and launching of a satellite is proportional to the payload. The higher the satellite payload, the greater the costs of design, manufacture and launching. The costs that are required in setting of the price of a small Boeing 502 satellite are as follows.
- Cost of dry mass and equipment such as cameras and computers
- Altitude determination control system (ADCS) costs
- BOL power (thermal) costs
- Cost of the launch/propulsion
Sample Cost Structure for Boeing 502 Small Satellite
Using the cost-based approach, the approximate cost of a small Boeing 502 satellite can be determined as follows. The price of the satellite is equal to the sum of all the production costs plus the desired profit margin. NASA (2014) provided the approximate development costs of the cost variables above as follows:
| Variable | Approximate cost (million dollars) |
| Dry mass and Equipment | 300 |
| ADCS | 40 |
| Thermal | 26 |
| Propulsion | 50 |
| Total | 416 |
Assuming the company desires to make a profit margin of about 25%, the Boeing 502 small satellite price in the market would then be {125/100*416), which equals 520 million U.S dollars. The total price equals the total cost of production plus the company calculated profit margin. The projected profit margin of 25% equals to a profit of about 104 million U.S dollars, which is a sizeable return given the technology, other risks such as failure, human and financial capital involved in the design, production and launch of the satellite. As it can be seen from the cost structure, the design, development and propulsion of small satellite is an extremely costly venture. However, this is justified in the huge profit margins that can be achieved by the company when all the costs of production are taken into consideration.
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