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Part 1:
Decision Process and Optimization Methodology
XMBA 206.1
Summer 2008
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Examples of Versioning
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Adobe http://www.adobe.com/products/main.html
Microsoft Office:
Product Line (Versioning) in Action
Office 2000
Developer
Office 2000
Premium
Office 2000
Small Business
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Office 2000
Professional
Office 2000
Standard
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Palm Vx
$299
Palm IIIxe
$179
Palm m100
$129
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Should the firm offer more than one version of Modeler? If so, which
versions should it offer? At what prices?
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Stage 1
Product Choice
Backwards
Induction
Stage 2
Pricing and Targeting
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Decision Process
Stage 2: Pricing and Targeting for a given product
Relevant Costs
What are the relevant costs at this stage of decision making?
segment development cost
variable cost (per unit)
Is product completion cost a relevant cost at this stage?
Economic Trade-off:
unit contribution-margin vs. volume (# segments served).
choose the price which gives the maximum total contribution.
Total Contribution = Unit Price Volume - Segment Dev. Cost(s).
Can the optimal price of CSC be different from $ 50, $ 100, $ 150, $ 175 or $ 200?
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Student version
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Key Learning: Look out for Fixed Cost traps in decision making.
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Recaptwo-stage process.
Stage 1
Product Choice
Backwards
Induction
Stage 2
Pricing and Targeting
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Single-version Case
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Product Line
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Apple
Gaming
WSJ student edition
Pharmaceutical firms and medical interns.
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Can you charge $ 600 for the Industrial version as in the single
product case?
What are the considerations?
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Surplus from
Student
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Buyer
E
E&G
Revenues
$1000
$1600
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Disabling Attributes
If Intel can charge different prices to different users
$800 to G
$1000 to E
Total:
$1800
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Disabling Attributes
The seller wants to charge G less than E for the same 486 chip.
At the same time, the seller has to prevent E from buying the
product meant for G. What does the seller do?
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Controlling Cannibalization
Two Methods
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Method #1: Cut the price of your high-end version to ensure that
your high-value customers buy the high end version.
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Point #1: Identify the attributes/features that are highly valued by some
customer segments yet of little importance to other customer segments
Point #2: Greater the differences among the customers in their intensity
of preference for the differentiating attribute, the wider is the product line.
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