Cambridge Software Corporation Case solution

Essay by fannycffUniversity, Master's February 2014

Cambridge Software Corporation Case

 Question 1: If Cambridge Software is obliged to launch just one product, which one should it be, and how should it be priced?

For every single version, we have calculated the total contribution for each price that segments are willing to pay, and chosen the price that can maximize the total contribution.

 Sell only "student" version Price Segments unit cost Unit Contribution Seg. Dev. Costs Demand Total Contribution \$200 Consultants \$15 \$185 \$200,000 \$20,000 \$3,500,000 \$175 Small business& Consultants \$15 \$160 \$400,000 \$35,000 \$5,200,000 \$150 Large Corporate & Small business & Consultants \$15 \$135 \$550,000 \$40,000 \$4,850,000 \$100 Corporate R&D & large Corporate & Small business & Consultants \$15 \$85 \$650,000 \$42,000 \$2,920,000 \$50 Student & Corporate R&D& Large Corporate& Small biz&Consultants \$15 35,15 \$950,000 \$42,000,500,000 \$8,020,000

The optimal price for the "student version" is \$ 50 at which all 5 segments would be included and the total contribution from selling this version amounts to \$ 8,020,000.

 Sell only the "commercial" version Price Segments unit cost Unit Contribution Seg. Dev. Costs Demand Total Contribution \$1,200 Large Corporate \$25 \$1,175 \$150,000 \$5,000 \$5,725,000 \$1,000 Corporate R&D& large Corporate \$25 \$975 \$250,000 \$7,000 \$6,575,000 \$300 Consultants& Corporate R&D &large Corporate \$25 \$275 \$450,000 \$27,000 \$6,975,000 \$225 Small Business &Consultants& Corporate R&D &large Corporate \$25 \$200 \$650,000 \$42,000 \$7,750,000 \$60 Students& Small Biz & Consultants& Corporate R&D &large Corporate \$25 \$35,\$11 \$950,000 \$42,000,500,000 \$6,020,000

The optimal price for the "Commercial version" is \$ 225, at which four segments, excluding the "student segment" would serve and the total contribution from this version equals \$7,750,000.

 Sell only the "Industrial" version Price Segments unit cost Unit Contribution Seg. Dev. Costs Demand Total Contribution \$2,500 Large Corporate \$35 \$2,465 \$150,000 \$5,000 \$12,175,000 \$2,000 Corporate R&D& large Corporate \$35 \$1,965 \$250,000 \$7,000 \$13,505,000 \$600 Consultants& Corporate R&D &large Corporate \$35 \$565 \$450,000 \$27,000 \$14,805,000 \$300 Small Business & Consultants& Corporate R&D &large Corporate \$35 \$265 \$650,000 \$42,000 \$10,480,000 \$100 Students& Small Business & Consultants& Corporate R&D &large Corporate \$35 65,25 \$950,000 \$42,000,500,000 \$14,280,000

The optimal price for "Industrial" version is \$ 600, at which three segments, excluding the "student segment" and "small business segment", would serve and the total contribution from this version sums up to \$14,805,000.

The net contribution for each single version are following:

 Net contribution for each version Version Optimal Price Segments Served Total Contribution net total contribution Student \$50 Student & Corporate& Large& Small& Consultants \$8,020,000 \$7,920,000 Commercial \$225 Small & consultants & corporate & Large \$7,750,000 \$7,550,000 Industrial \$600 Consultants & Corporate& Large \$14,805,000 \$14,305,000

From the table above, we suggest that the company chooses to sell the "Industrial" version. The optimal price is \$600, targeting the consulting, corporate R&D and large corporate segments.

 Question 2: If several versions are allowed, which should be launched, and how should they be priced?

Assumption and related concept:

Consumer surplus is an economic measure of consumer satisfaction, which is calculated by analyzing the difference between what consumers are willing to pay for a good or service relative to its market price.

To predict the consumers' purchasing behavior, we assume that customers would buy the product with a higher surplus, which means customers would get more satisfaction.

Decision: Student Version (S) + Industrial Version (I)

Based on the result of Question 1, we have reached the conclusion that Industrial version (I) is the most profitable one. And we also noticed that I version only caters for the first three segments, which means I version is more profitable among high-end customers. Meanwhile, under the optimal price, Student version (S) caters for all the segments and Commercial version (C) caters for the segments apart from students, which means S version can earn more from low-end customers and C version can earn more from middle-end customers.

Therefore, if CSC wants to make more profit, it can use I version to attract high-end customers and use C or S version to attract middle-to-low-end customers. So based on these logics, we have two choices, which are S+I and C+I. In these combinations, we cannot directly know which situation is the most profitable one since there are many situations where different versions cater for different segments. To achieve the precise result, we listed all the possibilities and calculated all the profits based on the assumption of consumer surplus to see which combination is most profit. (Detailed calculation process can be found in Appendix.)

S version + I version:

Segments

Situations

C version + I version:

Segments

Situations

From the above tables we can see that, S version + I version can achieve the biggest profit, which is \$21,180,000. And the price should be set at \$50 for S version and not more than 1950 for I version.

In conclusion, the Student version and Industrial version should be launched and the price should be \$50 and no more than \$1950 respectively.

Regarding this combination, we also discussed its PROs and CONs as follows:

PROs:

1. By launching more versions, CSC could maximize their profit in building larger volumes through reaching more customers, rather than merely focusing on high end customers.

2. Expanding the customer segment and product line can help CSC set barrier for potential competitors. If different segments are satisfied with CSC offerings, they are unlikely to turn to other products.

3. The students have great potential in their future to become our highest profitable customers. Investing them earlier can help to build their brand loyalty and make them familiar with the product.

4. Offering students version may increase the image of the brand as CSC cares about students and offers them an affordable option to use the software.

CONs:

1. It may cause customer confusion, because customers have several options which might create uncertainty which would be the right one to buy.

2. Cannibalization between the product lines could lead to inefficiency in creating profit.

3. Endangers the image of a premium brand

Appendix:

Situation A:

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large, multidivisional corporations I \$175 \$140 \$550,000 \$100,000 2,000 Corporate R&D and university laboratories I \$175 \$140 \$180,000 \$200,000 20,000 Consultants and professional companies I \$175 \$140 \$2,600,000 \$200,000 15,000 Small businesses I \$175 \$140 \$1,900,000 \$300,000 500,000 Students S \$50 \$15 \$7,200,000 Ã£ÂÂ Ã£ÂÂ Ã£ÂÂ Total Profit for Situation 1 \$12,430,000
 Situation B Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large, multidivisional corporations I \$450 \$415 \$1,925,000 \$100,000 2,000 Corporate R&D and university laboratories I \$450 \$415 \$730,000 \$200,000 20,000 Consultants and professional companies I \$450 \$415 \$8,100,000 \$200,000 15,000 Small businesses S \$50 \$35 \$325,000 \$300,000 500,000 Students S \$50 \$15 \$7,200,000 Ã£ÂÂ Ã£ÂÂ Ã£ÂÂ Total Profit for Situation 2 \$18,280,000
 Situation C Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large, multidivisional corporations I \$1,950 \$1,915 \$9,425,000 \$100,000 2,000 Corporate R&D and university laboratories I \$1,950 \$1,915 \$3,730,000 \$200,000 20,000 Consultants and professional companies S \$50 \$35 \$500,000 \$200,000 15,000 Small businesses S \$50 \$35 \$325,000 \$300,000 500,000 Students S \$50 \$15 \$7,200,000 Ã£ÂÂ Ã£ÂÂ Total Profit for Situation 3 \$21,180,000
 Situation D Segment Dev.Cost Size Segment Version Price Unit Profit Segmental ProfitÃ£ÂÂ \$150,000 5,000 Large, multidivisional corporations I \$2,400 \$2,365 \$11,675,000 \$100,000 2,000 Corporate R&D and university laboratories S \$50 \$35 -\$30,000 \$200,000 20,000 Consultants and professional companies S \$50 \$35 \$500,000 \$200,000 15,000 Small businesses S \$50 \$35 \$325,000 \$300,000 500,000 Students S \$50 \$15 \$7,200,000 Ã£ÂÂ Ã£ÂÂ Total Profit for Situation 4 \$19,670,000

Situation E

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$500 \$465 \$2,175,000 \$100,000 2,000 Corporate R&D and university laboratories I \$500 \$465 \$830,000 \$200,000 20,000 Consultants and professional companies I \$500 \$465 \$9,100,000 \$200,000 15,000 Small businessed S \$100 \$85 \$1,075,000 \$300,000 500,000 Students Ã£ÂÂ Ã£ÂÂ Ã£ÂÂ Total Profit for Situation E \$13,180,000

Situation F

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$2,000 \$1,965 \$9,675,000 \$100,000 2,000 Corporate R&D and university laboratories I \$2,000 \$1,965 \$3,830,000 \$200,000 20,000 Consultants and professional companies S \$100 \$85 \$1,500,000 \$200,000 15,000 Small businessed S \$100 \$85 \$1,075,000 \$300,000 500,000 Students Ã£ÂÂ Ã£ÂÂ Ã£ÂÂ Ã£ÂÂ \$16,080,000

Situation G

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$2,450 \$2,415 \$11,925,000 \$100,000 2,000 Corporate R&D and university laboratories S \$100 \$85 \$70,000 \$200,000 20,000 Consultants and professional companies S \$100 \$85 \$1,500,000 \$200,000 15,000 Small businessed S \$100 \$85 \$1,075,000 \$300,000 500,000 Students Ã£ÂÂ Ã£ÂÂ Ã£ÂÂ Ã£ÂÂ \$14,570,000

Situation H

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$600 \$565 \$2,675,000 \$100,000 2,000 Corporate R&D and university laboratories I \$600 \$565 \$1,030,000 \$200,000 20,000 Consultants and professional companies S \$200 \$185 \$3,500,000 \$200,000 15,000 Small businessed Ã£ÂÂ Ã£ÂÂ Ã£ÂÂ Ã£ÂÂ \$300,000 500,000 Students Ã£ÂÂ Ã£ÂÂ Ã£ÂÂ Ã£ÂÂ \$7,205,000

Situation K

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$135 \$100 \$350,000 \$100,000 2,000 Corporate R&D and university laboratories I \$135 \$100 \$100,000 \$200,000 20,000 Consultants and professional companies I \$135 \$100 \$1,800,000 \$200,000 15,000 Small businessed I \$135 \$100 \$1,300,000 \$300,000 500,000 Students C \$60 \$21 \$10,200,000 \$13,750,000

Situation L

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$360 \$325 \$1,475,000 \$100,000 2,000 Corporate R&D and university laboratories I \$360 \$325 \$550,000 \$200,000 20,000 Consultants and professional companies I \$360 \$325 \$6,300,000 \$200,000 15,000 Small businessed C \$60 \$35 \$325,000 \$300,000 500,000 Students C \$60 \$11 \$5,200,000 \$13,850,000

Situation M

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$1,060 \$1,025 \$4,975,000 \$100,000 2,000 Corporate R&D and university laboratories I \$1,060 \$1,025 \$1,950,000 \$200,000 20,000 Consultants and professional companies C \$60 \$35 \$500,000 \$200,000 15,000 Small businessed C \$60 \$35 \$325,000 \$300,000 500,000 Students C \$60 \$11 \$5,200,000 \$12,950,000

Situation N

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$1,360 \$1,325 \$6,475,000 \$100,000 2,000 Corporate R&D and university laboratories C \$60 \$35 -\$30,000 \$200,000 20,000 Consultants and professional companies C \$60 \$35 \$500,000 \$200,000 15,000 Small businessed C \$60 \$35 \$325,000 \$300,000 500,000 Students C \$60 \$11 \$5,200,000 \$12,470,000

Situation O

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$525 \$490 \$2,300,000 \$100,000 2,000 Corporate R&D and university laboratories I \$525 \$490 \$880,000 \$200,000 20,000 Consultants and professional companies I \$525 \$490 \$9,600,000 \$200,000 15,000 Small businessed C \$225 \$200 \$2,800,000 Ã£ÂÂ 500,000 Students Ã£ÂÂ Ã£ÂÂ \$0 \$15,580,000

Situation P

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$1,225 \$1,190 \$5,800,000 \$100,000 2,000 Corporate R&D and university laboratories I \$1,225 \$1,190 \$2,280,000 \$200,000 20,000 Consultants and professional companies C \$225 \$200 \$3,800,000 \$200,000 15,000 Small businessed C \$225 \$200 \$2,800,000 Ã£ÂÂ 500,000 Students Ã£ÂÂ Ã£ÂÂ \$0 \$14,680,000

Situation Q

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$1,525 \$1,490 \$7,300,000 \$100,000 2,000 Corporate R&D and university laboratories C \$225 \$200 \$300,000 \$200,000 20,000 Consultants and professional companies C \$225 \$200 \$3,800,000 \$200,000 15,000 Small businessed C \$225 \$200 \$2,800,000 Ã£ÂÂ 500,000 Students Ã£ÂÂ Ã£ÂÂ \$0 \$14,200,000

Situation R

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$1,300 \$1,265 \$6,175,000 \$100,000 2,000 Corporate R&D and university laboratories I \$1,300 \$1,265 \$2,430,000 \$200,000 20,000 Consultants and professional companies C \$300 \$275 \$5,300,000 Ã£ÂÂ 15,000 Small businessed Ã£ÂÂ Ã£ÂÂ \$0 Ã£ÂÂ 500,000 Students Ã£ÂÂ Ã£ÂÂ \$0 \$13,905,000

Situation S

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$1,600 \$1,565 \$7,675,000 \$100,000 2,000 Corporate R&D and university laboratories C \$300 \$275 \$450,000 \$200,000 20,000 Consultants and professional companies C \$300 \$275 \$5,300,000 Ã£ÂÂ 15,000 Small businessed Ã£ÂÂ Ã£ÂÂ \$0 Ã£ÂÂ 500,000 Students Ã£ÂÂ Ã£ÂÂ \$0 \$13,425,000

Situation T

 Segment Dev.Cost Size Segment Version Price Unit Profit Segmental Profit \$150,000 5,000 Large,multidivisional corporations I \$2,300 \$2,265 \$11,175,000 \$100,000 2,000 Corporate R&D and university laboratories C \$1,000 \$975 \$1,850,000 Ã£ÂÂ 20,000 Consultants and professional companies Ã£ÂÂ Ã£ÂÂ \$0 Ã£ÂÂ 15,000 Small businessed Ã£ÂÂ Ã£ÂÂ \$0 Ã£ÂÂ 500,000 Students Ã£ÂÂ Ã£ÂÂ \$0 \$13,025,000