Cambridge Software Corporation is about to decide whether to offer multiple versions of Modeler, a new Lotus-1, 2, 3 compatible modeling software product. Software Market Research Group cooperating with Modeler Project team identified five segments as large, multidivisional corporations; corporate R&D and universities labs; consultant and professional companies; small businesses; and students. CSC has identified three versions to serve these segments. These versions are “Industrial”, “Commercial” and “Student” versions. The decision to be made are, if the company want to launch only one version of software which version should it offer, at what price and how many different versions of the Modeler should they offer at what prices.
The company should evaluate each version at each offered price based on the total contribution and net total contribution, to decide which version should be offered. To be able to calculate total contributions, unit contributions are calculated, at first. Variable costs should be taken into account for the unit contribution calculations. Since they are both avoidable and incremental, variable costs per unit and segment development costs are considered as variable costs. Since estimated product completion cost is fixed cost, it is taken into account in the net total contribution calculations.
While the total contribution calculation of the student version, it is considered that CSC would sell through college bookstores with the bookstore getting 40% commissions and CSC getting 60% of the price. For the “Student” version; optimal price is found as $50 with $8,050,000 total contribution (Exhibit1A). At this price, all segments except consultant and professional companies are targeted with the “Student” version. For the “Commercial” version, the optimal price is identified as $225 with $7,750,000 (Exhibit 1B). At this price, “Commercial” version serves four segments except the students segment. For the “Industrial” version, the optimal price is turned out to be $600 with $14,805,000 total contribution (Exhibit 1C). With this price, targeted segments are large, multidivisional corporations; corporate R&D and university labs; and consultants and professional companies. With respect to these optimal prices, net contributions are calculated and found as $7,950,000 for “Student” segment, $7,550,000 for “Commercial” segment and $14,305,000 for “Industrial” segment (Exhibit 1D). As a result, if CSC wants to launch one version, it should offer “Industrial” version at $600 since the highest net contribution is generated by this version at this price.
To decide how many versions to be launched into market, combinations of two versions and the all three versions are considered. Since “Industrial” version brings the highest net total contribution, we want to include this version in all combinations. Thus, we have two options for the combinations of the two versions; “Student” and “Industrial”; and “Commercial” and “Industrial”. In option 1, we target the students with the “Students” version so it should be priced as $50 to make students buy this version. Considering this price as constant at $50, the price for “Industrial” version should be set to ensure the large, multidivisional corporations; corporate R&D and university labs; and consultants and professional companies to prefer “Industrial” version over “Student” version. Because of the consumer would prefer the version with the higher consumer surplus, the surpluses should be calculated for the price decision. Exhibit 2A shows the consumer surpluses for each version at the optimal price within the product line. To determine the optimal price for the “Industrial” version, first we should calculate the maximum price. The maximum price is the price which makes the consumer surplus of the “Industrial” version to be equal to the consumer surplus of “Student” version where the consumer will be indifferent between two...