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PRODUCT LINE PRICING:

CAMBRIDGE SOFTWARE CASE

Marketing Decision Making

PROFESSOR S. SAJEESH
Cambridge Software
◼ Product Line
◼ Design
◼ Pricing
◼ How many different versions of “Modeler”
◼ Prices of Each Version
◼ Questions
◼ If we were to offer only one version – then which one and what price
◼ If we were to offer multiple versions then which ones and what price.
Product Lines
◼ Lexus and Toyota
◼ MasterCard Gold and Platinum
◼ Walmart and Sams Club
◼ Ipad and Ipad mini
◼ Marriott, Courtyard by Marriott, Residence Inn
◼ Taj, Vivanta, Gateway, Ginger
◼ Johnnie Walker Red, Black, Gold, Blue
Case Data
VERSIONS Student Commercial Industrial
Completion Cost $100K $200K $500K
Variable $15 $25 $35
Cost/unit
Segment Size Dev cost

Large Co 5000 $150K $150 $1200 $2500

R&D labs 2000 $100K $100 $1000 $2000

Consultants 20000 $200K $200 $300 $600

Small Bus 15000 $200K $175 $225 $300

Students 500000 $300K $50 $60 $100


Assumptions
◼ Assume that all customers within each segment are homogeneous (if one buys – then all
buy).

◼ No adoption delay (all consumers adopt simultaneously, if they do).

◼ The Willingness to Pay (WTP) summarizes preferences completely. At the end of the day, if
price is lower than WTP, then consumer buys.

◼ As a starting assumption, we shall assume that if you offer more than one product, then all
consumers have access to it (i.e. you can not say that R&D Labs will not be able to but the
Student Version – they can). Think of it as products listed in a catalog and any one can
order the one they want.

◼ What if two products are priced below Willingness to Pay (WTP). Then we shall assume that
the consumer buys the one that gives the highest “Consumer Surplus” defined as [WTP –
Price].
Decisions
◼ If we are to launch only one version, which one should it be and what
should be the price

◼ If we were to launch more than one version, which ones should we


launch
Results
◼ One Version Case: Offer Industrial Version at a price of $600.
◼ profits = $14,305K
◼ all except small businesses and students will buy.
◼ consumer surplus: $12,300K

◼ Total Surplus: $26,505K

◼ Multi-Version Case: Offer Industrial at $1950 and Student at $50.


◼ profits: $12,655K + $7,425K = $20,580K
◼ consumer surplus = $7,725K
◼ Total surplus = $28,305K
◼ consumer surplus goes down because high-end users are paying more. However,
more consumers can enjoy the product
Summary Comments
◼ Product Line – contemporaneous price discrimination
◼ Temporal vs. contemporaneous: loss in profit
◼ Using price to direct consumers vs. sealing segments
◼ Quantifying the profit impact of going for sub-optimal solutions for
strategic reasons
◼ Offering a broader product line to ensure broader coverage (future gains)
◼ Risk of Pricing Errors
◼ Low profit elasticity
◼ Data and Analysis needed for Product line Pricing
Product Line Pricing [and CSC Case]
◼ If we could launch one version of the product at a time, we would launch the
Industrial at $2500, lower its price a little, then at some point in time launch the
commercial version, and so on. However, due to shorter windows of
opportunity as in the CSC Case, they find it necessary to create a product line
◼ Competition: [within the product line]: The competition in the product line
forces some constraints on what prices we can charge. We can not engage in
First Degree Price Discrimination fully. Also as we account for inter-company
competition:
◼ Generally speaking, the number of products is less than the number of segments.
◼ Generally speaking, the lowest segment gets the least surplus
◼ Normally, the problem of product line pricing will become complicated if we
were to just try different prices for each possible set of product that we can
offer. However, by recognizing the specific structure of the problem, we can
convert it into a much simpler problem so that only a few combinations have to
be evaluated.
◼ Eventually we need to account for Intra-Brand and Inter-Brand Competition
Product line Pricing Decision - Flowchart
MARKET DATA

FIRM OBJECTIVES
CONSUMER DECISION RULE
PRICING CONSTRAINTS

ANALYSIS

RESULTS

INTERPRETATION
STRATEGIC IMPLICATIONS