HOMEWORK ASSIGNMENT 4

PRICING POLICIES MKT414/STR423

Due date:
Group members:

5th November 2014, 3pm

Anniken Jensen
Henny Viktoria Lomo
Huyen Thu Do
Trang Hong Trinh

MKT414/STR423
1. If Cambridge Software Corporation offers only one version of Modeler,
which version should it offer? At what price?
In order to find out which single version of Modeler that Cambridge Software
Corporation (CSC) should offer, we need:
Step 1: Find out the optimal price of each version when offered alone;
Step 2: Compare the net profits at optimal prices of 3 versions to choose the
best option.
For simplification, denote segments with numbers as below:
Segments

Seg dev. Cost

Size

(1): Large, multidivisional corporations

150,000

5000

(2): Corporate R&D and university labs

100,000

2000

200,000

20000

(4): Small businesses

200,000

15000

(5): Students

300,000

500000

(3): Consultants and professional

companies

(a) Suppose CSC offers Student version only

Willingness to pay of each segment from high to low is:

Segment (3) Consultants and professional companies: $200;

Segment (4) Small businesses: $175;
Segment (1) Large, multidivisional corporations: $150;
Segment (2) Corporate R&D and university laboratories: $100;
Segment (5) Students: $50.

Since CSC introduces only one version, different segments may decide differently
whether to buy or not to buy, given the offered price and their willingness-to-pay.
For example:
If CSC prices $200 for Student version, only segment (3) will buy.
CSC only incurs $200,000 development cost of segment (3)
Total demand is the size of segment (3), which is 20,000.
Unit contribution in this case is:
U nit contribution=PriceVariable cost=$ 200$ 15=$ 185

MKT414/STR423
If CSC chooses to offer the Student version only, regardless of the segments
serves, it has to incur the estimated product completion cost of $100,000. So it is a
sunk cost and thus not relevant for pricing decision.
Therefore, profit in this case is:
Profit=Unit contribution DemandDeve lopment Cost
$ 185 20,000$ 200,000=$ 3,500,000

Similarly, we can calculate the profit when CSC charges different prices. The
following table summarizes the results:
Unit
Price

Segment served

contributio
n

Seg dev.

Deman

Cost

Profit

200

(3)

185

200,000

20,000

3,500,000

175

(3), (4)

160

400,000

35,000

5,200,000

150

(3), (4), (1)

135

550,000

40,000

4,850,000

100

(3), (4), (1), (2)

85

650,000

42,000

2,920,000

50

(3), (4), (1), (2), (5)

35 /15 (*)

950,000

542,000

8,020,000

(*) CSC would sell to student segment through college book stores which get 40%
commission so that CSC nets only 60% of the sale price of $50. So at the price of
$50, the unit contribution for student segment is: 60 $ 50$ 15=$ 15 while
others: $ 50$ 15=$ 35
From the above table, CSC should charge Student version if offered alone at the
price of $50 since it brings the highest profit of $8,020,000.

MKT414/STR423
(b) In case CSC offers only Commercial version
Similar to (a), we have the following summary table:
Price

Segment served

Unit

Seg dev.

Deman

contributio

Cost

Profit

n
1200

(1)

1175

150,000

5,000 5,725,000

1000

(1), (2)

975

250,000

7,000 6,575,000

300

(1), (2), (3)

275

450,000

27,000 6,975,000

225

(3), (4), (1), (2)

200

650,000

42,000 7,750,000

60

(3), (4), (1), (2), (5)

35/11 (**)

950,000

542,000 6,020,000

(**) At price of $60, unit contribution for student segment is:

60 $ 60$ 25=$ 11 while others: $ 60$ 25=$ 35 .

CSC should charge Commercial version at the price of $225 if offered alone,
since it brings the highest profit of $7,750,000
(c) In case CSC offers only Industrial version
Similar to (a), we have the following summary table:
Price
2500

Segment served
(1)

Unit

Seg dev.

Deman

contribution

Cost

2465

150,000

Profit

5,000 12,175,00
0

2000

(1), (2)

1965

250,000

7,000 13,505,00
0

600

(1), (2), (3)

565

450,000

27,000 14,805,00
0

300

(3), (4), (1), (2)

265

650,000

42,000 10,480,00
0

100

(3), (4), (1), (2), (5)

65/25 (***)

950,000

542,000 14,280,00
0

MKT414/STR423
(***) At price of $100, unit contribution for student segment is:
60 $ 100$ 35=$ 25 while others: $ 100$ 35=$ 65 .

CSC should charge Industrial version at the price of $600 if offered alone, since
it brings the highest profit of $14,805,000
According to the above analysis, the optimal price of each version when CSC offers
only one Modeler version is: $50 for Student, $225 for Commercial, $600 for
Industrial, which brings CSC the profit of $8,020,000; $7,750,000 and
$14,805,000 respectively.
Different versions have different estimated product completion costs. CSC should
choose the one has the highest profit after subtracting that cost. We have:

Version

Price

Profit

Completion
cost

Net profit

Student

$50

$8,020,000

$100,000

$7,920,000

Commercial

$225

$7,750,000

$200,000

$7,550,000

Industrial

$600

$14,805,000

$500,000

$14,305,000

According to the table above, the Industrial version at price of $600 has the
highest profit. Therefore, if offering only one version, CSC should choose the
Industrial and charge it at $600.

MKT414/STR423

2) Should the firm offer more than one version of Modeler? If so, which
versions should it offer? At what prices?
In order to find out if they should offer several versions, and which versions of
Modeler that Cambridge Software Corporation (CSC) should offer, we need:
Step 1: Find out the optimal price of each product in the product mix;
Step 2: Compare the net profits at optimal prices of the to choose the best
option.
(a) Suppose CSF offer industrial and student version
We will start to look at the option of selling only the industrial and the student
version, since they make the most sense - CSF wants to reach as many segments
as possible and maximize their profit. Segment one and two are willing to pay
$1900 and $2350 more for the industrial version compared to the student
version. This allows CSF to charge higher for the industrial version than if
commercial also was offered, when the customer surplus was as low as $1000.
(a.1) Industrial version at $450 and student version at $50
See the following summary table:
Give (3) CS =$150 for industrial
version:
(1), (2), (3) buy industrial version; (4), (5) buy
student version
Price

Version
Industrial (1), (2),
450 (3)
50 Student (4), (5)

Total
contrib
Dev cost
Demand ution
107550
415
450,000
27,000
00
35/15
500,000
515,000 752500

Unit
contribution

MKT414/STR423

0
182800
00
176800 (Development cost
00 and student $100,0
(1), (2) buy industrial version; (3), (4), (5) buy
student version

Prices will be as follows:

Industrial (segments (1), (2) and (3): (3) are only willing to pay $400 more
for industrial than for student version, hence the price is $450.
Student segment (4) and (5): are only willing to pay $50, hence the price is
50$ as this is a big segment of 500,000 students.
If we price the industrial version at $450 and the student version at $50, our total
contribution will be $18280000.

(a.2) Industrial version to $1950 and student version for $50

Similar to (a.1), we have the following summary table:

(1), (2) buy industrial version; (3), (4), (5) buy

student version
=> Give (2) CS =$50
Dev
Total
Price
Version
Unit contribution cost
Demand contribution
1950 Industrial (1), (2)
1915 250,000
7,000
131550
50 Student (3), (4), (5)
35/15 700,000 535,000
80250
211800

205800

The prices will be as following:

MKT414/STR423
Industrial (segments (1) and (2): (3) are only willing to pay $1900 more for
industrial than for student version, hence the price is $1950.
Student segment (3), (4) and (5): (5) are only willing to pay $50, hence the
price is 50$ as this is a big segment of 500,000 students.
If we price the industrial version at $1950 and student version at $50, our total
contribution will be $21180000.

(b) Suppose CSF offers both the industrial and commercial product
Similar to (a), see following tables underneath:
The best option for this pricing method is a total contribution of $15580000,
$560000 less than if they offered the industrial and student version (see tables
underneath).
(c) Suppose CSF offers all the products
Similar to (a) and (b), see following tables underneath:
The prices will be as following:
Industrial (segments (1) and (2): (2) are only willing to pay $1000 more for
industrial than for commercial version, hence the price is $1100.
Commercial segment (3) and (4): (4) are only willing to pay $400 more for
the commercial product than for the student product, hence the price is $100
Student segment (3), (4) and (5): (5) are only willing to pay $50, hence the
price is 50$ as this is a big segment of 500,000 students.
This will give us a total contribution of $19630000.

The product mix that maximizes our profit is the industrial version for $1950
and student version for $50, as this will give us our total contribution to be
$21180000.

MKT414/STR423