CSC Economics

Cambridge Software Corporation

Product Mix Recommendations by Seema Gupta

Modeler Marketing & Pricing

Case Analysis submitted by Seema Gupta MSIS – TECM-620Submitted on 6/14/2012

Table of Contents

List of Tables...................................................................................................................................ii

Executive Summary.........................................................................................................................1

Problem Identification.....................................................................................................................1

Methodology....................................................................................................................................2

Detailed Analysis.............................................................................................................................3

Single-version offering................................................................................................................3

Two-version offering...................................................................................................................5

Recommendations............................................................................................................................6

Single-version Modeler...............................................................................................................6

Two-Version Modeler.................................................................................................................7

Conclusions......................................................................................................................................7

Appendix A: Cost, Demand, and Willingness to pay estimates......................................................8

Appendix B: Two-version offering – Commercial version profitability analysis...........................9


List of Tables

Table 1: Modeler Single Version Revenue Analysis......................................................................4Table 2: Consumer Surplus with Student version of Modeler........................................................5Table 3: Calculating new target price for Industrial version...........................................................5Table 4: Updated Industrial version revenue chart..........................................................................5Table 5: Additional revenue with Student version..........................................................................6Table 6: Revenue comparison Single vs. Two-version product release..........................................7Table 7: Cost, Demand and Willingness to pay estimates (Source: SMRG)...................................8Table 8: Consumer Surplus with Commercial version of Modeler.................................................9Table 9: Calculating new target price for Industrial version...........................................................9Table 10: Updated Industrial version revenue chart........................................................................9Table 11: Additional revenue with Commercial version.................................................................9


Executive Summary

Starting with products that ran on supercomputers and customized for the scientific and academic communities, CSC has come a long way by having 95% of its revenues coming from the commercial market segment. The company has always strived to move ahead and it is now time to look at other opportunities that can be leveraged given the domain expertise and research-based marketing analysis. Based on the available research by SMRB, there are opportunities to move to a multi-version product strategy. CSC has not offered multiple versions of their products so far, but all research and financial analysis points to opportunities that should be considered.

The challenge for this team was to recommend the most profitable version of the Modeler to launch as well as recommend whether a multi-version product strategy would be profitable as well. In our opinion, the company should launch two versions of the Modeler, namely the Industrial and the Student versions for maximizing total net profits ($20.58 million). This two-version strategy will net $6.275 million more than the optimal single-version i.e. Industrial version that will potentially generate net profits of $14.305 million.

Problem Identification

After a comprehensive marketing research, the marketing research company SMRG has presented the following research results:

Modeler has the capability of enabling the company to move from a single-version product to multiple-version product line.

The Modeler product can be developed as a three-version product line with an appeal in 5 distinct market segments.

Each of the three versions, namely, Student, Commercial and Industrial versions have distinct price points and a market size. Appendix A provides the results of the market research in detail.

The senior management team at Cambridge Software Corporation needs to take the following basic decisions:

What version or versions of the Modeler product to develop? What price point would be most profitable for each version of the Modeler offered to the

market?

As there are costs associated with any further product development, the management team must agree upon the course of action to complete product development in time for market release. In addition to considering the market research, the management team also needs to consider the impact of the product offering that the development team is working on in parallel that may make Modeler redundant in about 2 years.


Methodology

Our recommendations as discussed in the sections Detailed Analysis and Recommendations are based on the research results from SMRG (Appendix A) as well as the organization’s future goals. In addition, we have also completed the Five Forces Framework to represent the basis of our recommendations.

Figure 1: Five Forces Framework

As referenced in the Five Forces Framework, there is no competition in the market and the only substitutes for the product that may be available will be due to the company offering multiple versions of the software.

Based on the data collected by the market research firm SMRG, we did a revenue analysis for a single version offering. The revenue chart enabled us to identify the relevant costs and the contribution of each market-segment/version mix to the net profits. We found that the Industrial version of the Modeler offered at the optimal price of $600 per unit is most profitable within limited market segments for a single-version product launch.


To identify the product-mix (multiple version offering), we reviewed the impact of the introduction of a second version of Modeler along with the Industrial version. We found that with the introduction of a new version, the consumer now has a substitute product, which has negative price impact on the Industrial version. After a detailed analysis of potential consumer surplus for both the Student and Industrial versions of the product, our analysis leads us to recommend that if the company wants to move to a two-version offering, then the combination of the Industrial and Student versions of the Modeler product at $1950 and $50 maximize profits for the company. It is to be noted here that this product-mix offering at the given price levels exceeds the net profits from a single-version offering by 6.275 million dollars.

With this product mix, the company will be able to expand its market and reach out to the large student community. Although, no references have been made in the case analysis as to the benefits of brand recognition, we can logically infer that by reaching the student segment at the low price level, we are creating a user base that may potentially be a decision-maker in the acquisition of the higher-end version of the company’s products in the future.

Finally, with the profitability of the software at $14.3 million for the single version and $20.58 million of the multiple versions, it makes a good business sense to move ahead with the development as well as marketing efforts despite the possibility that the company is moving towards a completely new technology in the next two years.

Detailed Analysis

Single-version offering

A simple revenue chart provided a clear decision-tree of the product version, pricing and market segments to target for a single version offering of the Modeler product. Based on this analysis, the most profitable version of the Modeler product is the Industrial version targeted specifically to only the following three high-end market segments:

Large, multidivisional corporations Corporate R&D and university laboratories Consultants and professional companies

The detailed analysis of each version across various market segments shows that the optimal target price for maximum profits is $600 per unit. It is important to notice that despite the large market size, the student market is not profitable as large portion of the margins on the sale price goes towards Point of Sale commission to the vendors.


Modeler Single Version Revenue Analysis

Consultants Small Businesses Corporations Corp R&D Students

Mkt Size 20,000 15,000 5000 2000 500000

Cost of Mktg $ 200,000 $ 200,000 $ 150,000 $ 100,000 $ 300,000

Point of Sale Cost40%

of Sale price

Student Version

Net Proceeds/unit Net Consultants Net SB Net Corp Net R&D Net Students

Total Net Proceeds

Dev. Cost (fixed)

Net Profit (all segments)

Net Profit (profitable segments)

$200 $185 $ 3,500,000 $ 3,500,000 100000 $ 3,400,000 $ 3,400,000

$175 $160 $ 3,000,000 $ 2,200,000 $ 5,200,000 100000 $ 5,100,000 $ 5,100,000

$150 $135 $ 2,500,000 $ 1,825,000 $ 525,000 $ 4,850,000 100000 $ 4,750,000 $ 4,750,000

$100 $85 $ 1,500,000 $ 1,075,000 $ 275,000 $ 70,000 $ 2,920,000 100000 $ 2,820,000 $ 2,820,000

$50 $35 $ 500,000 $ 325,000 $ 25,000 $ (30,000) $ 7,200,000 $ 8,020,000 100000 $ 7,920,000 $ 7,950,000

Commercial Version


Total Net Proceeds

Dev. Cost (fixed)


Net Profit(profitable segments)

$1,200 $1,175 $ 5,725,000 $ 5,725,000 200000 $ 5,525,000 $ 5,525,000

$1,000 $975 $ 4,725,000 $ 1,850,000 $ 6,575,000 200000 $ 6,375,000 $ 6,375,000

$300 $275 $ 5,300,000 $ 1,225,000 $ 450,000 $ 6,975,000 200000 $ 6,775,000 $ 6,775,000

$225 $200 $ 3,800,000 $ 2,800,000 $ 850,000 $ 300,000 $ 7,750,000 200000 $ 7,550,000 $ 7,550,000

$60 $35 $ 500,000 $ 325,000 $ 25,000 $ (30,000) $ 5,200,000 $ 6,020,000 200000 $ 5,820,000 $ 5,850,000

Industrial Version


Total Net Proceeds

Dev. Cost (fixed)


Net Profit(profitable segments)

$2,500 $2,465 $ 12,175,000 $ 12,175,000 500000 $ 11,675,000 $ 11,675,000

$2,000 $1,965 $ 9,675,000 $ 3,830,000 $ 13,505,000 500000 $ 13,005,000 $ 13,005,000

$600 $565 $ 11,100,000 $ 2,675,000 $ 1,030,000 $ 14,805,000 500000 $ 14,305,000 $ 14,305,000

$300 $265 $ 5,100,000 $ 3,775,000 $ 1,175,000 $ 430,000 $ 10,480,000 500000 $ 9,980,000 $ 9,980,000

$100 $65 $ 1,100,000 $ 775,000 $ 175,000 $ 30,000 $ 12,200,000 $ 14,280,000 500000 $ 13,780,000 $ 13,780,000

Table 1: Modeler Single Version Revenue Analysis


Two-version offering

By offering two versions of the same product, we create a substitute for our own product. To identify the best version-mix, we reviewed the impact of offering either of the Student or Commercial versions in addition to the Industrial version of Modeler.

Here are some of our findings:Consumer Surplus: By introducing a second version, we introduce the analysis of consumer surplus for our existing target market. With the introduction of the Student version (our recommendation for two-version product release), the acceptable price of the Industrial should be reduced for each market to accommodate the consumer surplus.

Option #1 - Industrial + StudentStudent Price $50Industrial Price $600Student product surplus

Consumer SurplusAcceptable price of

Student version Surplus

Acceptable price (for

Industrial) SurplusConsultants $200 $150 $600 $0Corporations $150 $100 $2,500 $1,900Corp R&D $100 $50 $2,000 $1,400

Table 2: Consumer Surplus with Student version of Modeler

Computing new pricing for Industrial version

Maximum price for industrial version:Acceptable price for industrial version -Student

version surplusAcceptable price Student Surplus New acceptable price

Consultants $600 $150 $450Corporations $2,500 $100 $2,400Corp R&D $2,000 $50 $1,950

Table 3: Calculating new target price for Industrial version

Market-mix reallocation: With the new proposed acceptable prices for each market segment, we re-evaluate the net profitability of each segment.

Industrial Version

Net Proceeds/unit

Net Consultants Net Corp Net R&D

Total Net Proceeds

Dev. Cost (fixed)


$ 2,400 $ 2,365 $ 11,675,000

$ 11,675,000 $ 500,000

$ 11,175,000

$ 1,950 $ 1,915 $ 9,425,000 $ 3,730,000

$ 13,155,000 $ 500,000

$ 12,655,000

$ 450 $ 415 $ 8,100,000 $ 1,925,000 $ 730,000

$ 10,755,000 $ 500,000

$ 10,255,000


Table 4: Updated Industrial version revenue chart

Based on the above analysis, the company should introduce the Industrial version at $1950 per unit as compared to $600 in the single version strategy. This will lead to a reduction of $1.650 million in net revenues for the Industrial version as compared to the single-version. This loss is offset by the net revenues of introducing the Student version.

With the two version model, the company will do better by dropping the Consultants market segment for the Industrial version offering and only target the large Corporations and Corporate R&D organizations. This will allow the company to raise the price of the Industrial version to $1950 per unit.

Market expansion: By offering the Student version at $50, we not only add the Student market segment, but also add the Small Business market segment and move the Consultants from the Industrial version to the Student version. This will potentially generate an additional $7.925 million in net profits.

Student Version $50Net Proceeds/unit $35Net Consultants $ 500,000Net SB $ 325,000Net R&D $ (30,000)Net Students $ 7,200,000Total Net Proceeds $ 7,995,000Dev. Cost (fixed) $ 100,000Net Profit (all segments) $ 7,895,000Net Profit (profitable segments) $ 7,925,000

Table 5: Additional revenue with Student version

Similar analysis for the Commercial version was completed, based on which we selected the Student version as the option for the second version to develop. The analysis for the Commercial version has been provided in Appendix B.

Recommendations

Our recommendations are below:

Single-version Modeler Modeler version: Industrial Market Segments:

o Large, multidivisional corporationso Corporate R&D and university laboratories


o Consultants and professional companies Target Price: $600 Net revenues: $14.305 million

Two-Version Modeler Modeler versions: Industrial & Student Market Segments:

o Large, multidivisional corporations (Industrial version)o Corporate R&D and university laboratories (Industrial version)o Consultants and professional companies (Student version)o Small Businesses (Student version)o Students (Student version)

Target Price: $1950 (Industrial version), $50 (Student Version) Net revenues: $12.655 million (Industrial version) + $7.925 million (Student version) =

$20.58 million

We recommend offering two versions of the Modeler as this will generate $6.275 Million more in net profits.

Net revenues (two-version) $ 20,580,000Net revenues (single version) $ 14,305,000Difference $ 6,275,000

Table 6: Revenue comparison Single vs. Two-version product release

ConclusionsAlthough the company expects to move away from Modeler in the next two years, by offering two versions of the Modeler product will generate $20.58 million in net profits. With this strategy, we build brand recognition for our products with the students, as they are the future target market for higher-end version of our products.


Appendix A: Cost, Demand, and Willingness to pay estimates

Student Commercial IndustrialEstimated Product completion cost $ 100,000 $ 200,000 $ 500,000Variable cost (per unit) $ 15 $ 25 $ 35Market Segment Size Segment

Dev. Cost -------Willingness to Pay-------

Large, multidivisional corporations

5,000 $ 150,000 $ 150 $ 1,200 $ 2,500

Corporate R&D and university laboratories

2,000 $ 100,000 $ 100 $ 1,000 $ 2,000

Consultants and professional companies

20,000 $ 200,000 $ 200 $ 300 $ 600

Small businesses 15,000 $ 200,000 $ 175 $ 225 $ 300Students 500,000 $ 300,000 $ 50 $ 60 $ 100

Table 7: Cost, Demand and Willingness to pay estimates (Source: SMRG)


Appendix B: Two-version offering – Commercial version profitability analysis

Commercial profitable price $ 225Industrial Price $ 600Commercial product surplus

Consumer Surplus Acceptable price (commercial) Surplus

Acceptable price (Industrial) Surplus

Consultants $ 300 $ 250 $ 600 $ -Corporations $ 1,200 $ 1,150 $ 2,500 $ 1,900Corp R&D $ 1,000 $ 950 $ 2,000 $ 1,400

Table 8: Consumer Surplus with Commercial version of Modeler

Computing New pricing for Industrial versionAcceptable price Commercial Surplus New acceptable price

Consultants $ 600 $ 250 $ 350Corporations $ 2,500 $ 1,150 $ 1,350Corp R&D $ 2,000 $ 950 $ 1,050

Table 9: Calculating new target price for Industrial version

Market-mix reallocation:

Industrial Version

Net Proceeds/unit

Net Consultants Net Corp Net R&D

Total Net Proceeds

Dev. Cost (fixed)


$ 1,350 $ 1,315 $ 6,425,000 $ 6,425,000 $ 500,000 $ 5,925,000

$ 1,050 $ 1,015 $ 4,925,000 $ 1,930,000 $ 6,855,000 $ 500,000 $ 6,355,000

$ 350 $ 315 $ 6,100,000 $ 1,425,000 $ 530,000 $ 8,055,000 $ 500,000 $ 7,555,000Table 10: Updated Industrial version revenue chart

Commercial Version $ 225Net Proceeds/unit $ 200Net SB $ 2,800,000Total Net Proceeds $ 2,800,000Dev. Cost (fixed) $ 200,000Net Profit (all profitable segments) $ 2,600,000

Table 11: Additional revenue with Commercial version

Combined profits for Industrial & Commercial versions: $10.155 million

This is $10.425 Million less than the net profits with the Industrial & Student version product-mix.

CSC Economics

Documents

Transcript of CSC Economics