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Cambridge Software Corporation

Product Mix Recommendations by Seema Gupta

Modeler Marketing & Pricing

Case Analysis submitted by Seema Gupta MSIS TECM-620 Submitted 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

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

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

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

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 twoversion 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

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

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

Case Analysis submitted by Seema Gupta MSIS TECM-620 Submitted on 6/14/2012 Modeler Single Version Revenue Analysis
Consultants Mkt Size Cost of Mktg Point of Sale Cost 20,000 $ 200,000 Small Businesses 15,000 $ 200,000 Corporations 5000 $ 150,000 Corp R&D 2000 $ 100,000 Students 500000 $ 300,000 40% of Sale price
Net Profit (profitable segments) $ 3,400,000 $ 5,100,000 $ 4,750,000 $ 2,820,000 $ 7,950,000 Net Profit(profitable segments) $ 5,525,000 $ 6,375,000 $ 6,775,000 $ 7,550,000 $ 5,850,000 Net Profit(profitable segments) $ 11,675,000 $ 13,005,000 $ 14,305,000 $ 9,980,000 $ 13,780,000

Student Version $200 $175 $150 $100 $50 Commercia l Version $1,200 $1,000 $300 $225 $60 Industrial Version $2,500 $2,000 $600 $300 $100

Net Proceeds/unit $185 $160 $135 $85 $35 Net Proceeds/unit $1,175 $975 $275 $200 $35 Net Proceeds/unit $2,465 $1,965 $565 $265 $65

Net Consultants $ 3,500,000 $ 3,000,000 $ 2,500,000 $ 1,500,000 $ 500,000

Net SB $ 2,200,000 $ 1,825,000 $ 1,075,000 $ 325,000

Net Corp

Net R&D

Net Students

Total Net Proceeds $ 3,500,000 $ 5,200,000

Dev. Cost (fixed) 100000 100000 100000 100000 100000 Dev. Cost (fixed) 200000 200000 200000 200000 200000 Dev. Cost (fixed) 500000 500000 500000 500000 500000

Net Profit (all segments) $ 3,400,000 $ 5,100,000 $ 4,750,000 $ 2,820,000 $ 7,920,000 Net Profit (all segments) $ 5,525,000 $ 6,375,000 $ 6,775,000 $ 7,550,000 $ 5,820,000 Net Profit (all segments) $ 11,675,000 $ 13,005,000 $ 14,305,000 $ 9,980,000 $ 13,780,000

$ 525,000 $ 275,000 $ 25,000 $ 70,000 $ (30,000) $ 7,200,000

$ 4,850,000 $ 2,920,000 $ 8,020,000 Total Net Proceeds $ 5,725,000 $ 6,575,000 $ 6,975,000 $ 7,750,000 $ 5,200,000 $ 6,020,000 Total Net Proceeds $ 12,175,000 $ 13,505,000 $ 14,805,000 $ 10,480,000 $ 12,200,000 $ 14,280,000

Net Consultants

Net SB

Net Corp $ 5,725,000 $ 4,725,000

Net R&D $ 1,850,000 $ 450,000 $ 300,000 $ (30,000)

Net Students

$ 5,300,000 $ 3,800,000 $ 500,000 $ 2,800,000 $ 325,000

$ 1,225,000 $ 850,000 $ 25,000

Net Consultants

Net SB

Net Corp $ 12,175,000 $ 9,675,000

Net R&D $ 3,830,000 $ 1,030,000 $ 430,000 $ 30,000

Net Students

$ 11,100,000 $ 5,100,000 $ 1,100,000 $ 3,775,000 $ 775,000

$ 2,675,000 $ 1,175,000 $ 175,000

Table 1: Modeler Single Version Revenue Analysis

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

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 + Student Student Price Industrial Price Student product surplus

$50 $600 Acceptable price (for Industrial) $600 $2,500 $2,000

Consumer Surplus Consultants Corporations Corp R&D

Acceptable price of Student version $200 $150 $100

Surplus $150 $100 $50

Surplus $0 $1,900 $1,400

Table 2: Consumer Surplus with Student version of Modeler

Computing new pricing for Industrial version Acceptable price for industrial version -Student version surplus Student Surplus New acceptable price $150 $450 $100 $2,400 $50 $1,950

Maximum price for industrial version: Acceptable price Consultants $600 Corporations $2,500 Corp R&D $2,000

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 $ 2,400 $ 1,950 $ 450 Net Proceeds/ unit $ $ $ 2,365 1,915 415 Net Consultants Total Net Proceeds $ 11,675,000 $ 3,730,000 $ 13,155,000 Dev. Cost (fixed) $ $ $ 500,000 500,000 500,000 Net Profit (all segments) $ 11,175,000 $ 12,655,000 $ 10,255,000

Net Corp $ 11,675,000 $ 9,425,000

Net R&D

$ 8,100,000 $ 1,925,000 $ 730,000 $ 10,755,000 Table 4: Updated Industrial version revenue chart

Case Analysis submitted by Seema Gupta MSIS TECM-620 Submitted on 6/14/2012 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 Net Proceeds/unit Net Consultants Net SB Net R&D Net Students Total Net Proceeds Dev. Cost (fixed) Net Profit (all segments) Net Profit (profitable segments)

$ $ $ $ $ $ $ $

$50 $35 500,000 325,000 (30,000) 7,200,000 7,995,000 100,000 7,895,000 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 corporations o Corporate R&D and university laboratories o Consultants and professional companies

Case Analysis submitted by Seema Gupta MSIS TECM-620 Submitted on 6/14/2012 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) Net revenues (single version) Difference $ $ $ 20,580,000 14,305,000 6,275,000

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

Conclusions
Although 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.

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

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


Student Commercial $ 100,000 $ 200,000 $ 15 $ 25 -------Willingness to Pay------$ 150 $ 100 $ 200 $ 175 $ 50 $ 1,200 $ 1,000 $ 300 $ 225 $ 60 Industrial $ 500,000 $ 35

Estimated Product completion cost Variable cost (per unit) Market Segment Size Large, multidivisional corporations Corporate R&D and university laboratories Consultants and professional companies Small businesses Students 5,000 2,000 20,000 15,000 500,000

Segment Dev. Cost $ 150,000 $ 100,000 $ 200,000 $ 200,000 $ 300,000

$ 2,500 $ 2,000 $ 600 $ 300 $ 100

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

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

Appendix B: Two-version offering Commercial version profitability analysis


Commercial profitable price Industrial Price Commercial product surplus Consumer Surplus Consultants Corporations Corp R&D

$ $

225 600 Acceptable price (Industrial) $ 600 $ 2,500 $ 2,000

Acceptable price (commercial) $ 300 $ 1,200 $ 1,000

Surplus $ 250 $ 1,150 $ 950

Surplus $ $ 1,900 $ 1,400

Table 8: Consumer Surplus with Commercial version of Modeler

Computing New pricing for Industrial version Acceptable price Consultants $ 600 Corporations $ 2,500 Corp R&D $ 2,000

Commercial Surplus $ 250 $ 1,150 $ 950

New acceptable price $ 350 $ 1,350 $ 1,050

Table 9: Calculating new target price for Industrial version

Market-mix reallocation:
Industrial Version $ 1,350 $ 1,050 $ 350 Net Proceeds /unit $ 1,315 $ 1,015 $ 315 Net Consultants Total Net Proceeds $ 6,425,000 $ 1,930,000 $ 6,855,000 Dev. Cost (fixed) $ 500,000 $ 500,000 $ 500,000 Net Profit (all segments) $ 5,925,000 $ 6,355,000 $ 7,555,000

Net Corp $ 6,425,000 $ 4,925,000

Net R&D

$ 6,100,000 $ 1,425,000 $ 530,000 $ 8,055,000 Table 10: Updated Industrial version revenue chart

Commercial Version Net Proceeds/unit Net SB Total Net Proceeds Dev. Cost (fixed) Net Profit (all profitable segments)

$ $ $ $ $ $

225 200 2,800,000 2,800,000 200,000 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 productmix.