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.
Corporation Street, Birmingham - Midland Metro wor...
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Corporation Street, Birmingham - bus stop not in u...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 | ã | ã 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 | ã | ã 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 | ã | Total Profit for Situation 3 | $21,180,000 |
Situation D | ||||||
Segment Dev.Cost | Size | Segment | Version | Price | Unit Profit | Segmental Profitã |
$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 | ã | 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 | ã | ã | |
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 | ã | ã | ã |
$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 | ã | ã | ã |
$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 | ã | ã | ã |
$300,000 | 500,000 | Students | ã | ã | ã | ã |
$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 | 500,000 | Students | ã | ã | $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 | 500,000 | Students | ã | ã | $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 | 500,000 | Students | ã | ã | $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 | 15,000 | Small businessed | ã | ã | $0 | |
ã | 500,000 | Students | ã | ã | $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 | 15,000 | Small businessed | ã | ã | $0 | |
ã | 500,000 | Students | ã | ã | $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 | 20,000 | Consultants and professional companies | ã | ã | $0 | |
ã | 15,000 | Small businessed | ã | ã | $0 | |
ã | 500,000 | Students | ã | ã | $0 | |
$13,025,000 |