Question

The Context:

If Cambridge Software Corporation (CSC) offers only one version of Modeler, they maximize their profit from the software if they sell the Industrial version at $600. However, two market segments – ‘Small Businesses’ and ‘Students’ remain uncovered in that case. If CSC wants to cover the entire market they must offer the Student version at a price of $50. CSC cannot offer the Student version at price $50 replacing the Industrial version at $600, as the profitability of the firm is more in the latter case. Confronted with this scenario, CSC might think of offering multiple versions.

Project Questions 1.

If CSC offers Student version at price $50, should they offer the Industrial version along with it, or the Commercial version?

2. What should be the price of the other version offered along with Student version, if the Student version is priced at $50?

3. Can CSC offer all three versions? Provide reasons to your answer.

Submission Requirements

i. A excel file containing the calculations.

ii. A project report (within 400 words) in MS-Word.

Answer 1

If Cambridge Software Corporation were to offer only one version of Modeler, which version should it offer and at what price?

If Cambridge Software Corporation were to offer only version of Modeler, it should offer the “Industrial” version of the product and price it at $600. This will make the product viable to the top three segments viz. Large and multidivisional corporations, Corporate R&D and university laboratories, and Consultants and professional companies. This is based on the calculations of Total contribution of each version (See Exhibit 1).

The Industrial version at a price point of $600 yields the maximum contribution of $14.3 MM.

Formulae Used:

• Unit Contribution = Willingness to pay(Price)- Unit Variable Cost
• Total Profit(Contribution) = (Unit Contribution x Size)- Segment Dev. Cost - Production Completion Cost

How many different versions of the Modeler should CSC offer? At what price?

• CSC can offer different combinations of versions of Modeler. By offering the Industrial version alone, CSC is unable to capitalize on the large volumes in the Student segment (500,000). Since the Industrial version does not cater to the Student version at a price point of $600, it will benefit by offering a version that students can afford.
• Offering the Student version is more profitable than the Commercial version (Profits of 7.9 MM v 5.8MM). So CSC can look at Industrial and Student versions as an option.
• Pricing the Student version at $50 and Industrial version at $600 will cause the Large Corporations and Corporate Labs to stay with the Industrial version whereas the consultants will switch to the Student version as the consumer surplus is higher. (See Exhibit 2)
• Since consultants are no longer buying the Industrial version, $600 is not the optimal price anymore. It has to be altered based on profit calculations.
• From Exhibit 2, consultants will be indifferent between the two versions when the consumer surplus from both versions are equal, that is if Student version is priced at $50 and Industrial version priced at $450 (Both have consumer surplus 150). Similarly, corporate labs will be indifferent if the Industrial version was priced at $1950, and the same number for Large corporations is $2400.
• Pricing the industrial version at any price lower than these price points will ensure that these segments will buy the Industrial version while the segments below them will buy the Students version. Hence, let us consider prices of $449, $1949 and $2399 respectively for profit calculations. (See Exhibit 3)  
• From Exhibit 3, it is clear that CSC will profit from offering more than a single version. It will make the highest profit with the following offerings:

1. Industrial version priced at $1949 to cater to the Large Corporations and Corp. Labs.
2. Student version priced at $50 for the Consultants, Small Businesses and Students

• This will yield them profits of $20.5 MM which is $6.2 MM more than if they had offered just the Industrial version.

Exhibit 1

Exhibit 2

Exhibit 3