The Cambridge Software Corporation Marketing Essay

Cambridge Software Corporation is about to decide whether to offer multiple versions of Modeler, a new Lotus-1, 2, 3 compatible modeling software product. Software Market Research Group cooperating with Modeler Project team identified five segments as large, multidivisional corporations; corporate R&D and universities labs; consultant and professional companies; small businesses; and students. CSC has identified three versions to serve these segments. These versions are “Industrial”, “Commercial” and “Student” versions. The decision to be made are, if the company want to launch only one version of software which version should it offer, at what price and how many different versions of the Modeler should they offer at what prices.

The company should evaluate each version at each offered price based on the total contribution and net total contribution, to decide which version should be offered. To be able to calculate total contributions, unit contributions are calculated, at first. Variable costs should be taken into account for the unit contribution calculations. Since they are both avoidable and incremental, variable costs per unit and segment development costs are considered as variable costs. Since estimated product completion cost is fixed cost, it is taken into account in the net total contribution calculations.

While the total contribution calculation of the student version, it is considered that CSC would sell through college bookstores with the bookstore getting 40% commissions and CSC getting 60% of the price. For the “Student” version; optimal price is found as $50 with $8,050,000 total contribution (Exhibit1A). At this price, all segments except consultant and professional companies are targeted with the “Student” version. For the “Commercial” version, the optimal price is identified as $225 with $7,750,000 (Exhibit 1B). At this price, “Commercial” version serves four segments except the students segment. For the “Industrial” version, the optimal price is turned out to be $600 with $14,805,000 total contribution (Exhibit 1C). With this price, targeted segments are large, multidivisional corporations; corporate R&D and university labs; and consultants and professional companies. With respect to these optimal prices, net contributions are calculated and found as $7,950,000 for “Student” segment, $7,550,000 for “Commercial” segment and $14,305,000 for “Industrial” segment (Exhibit 1D). As a result, if CSC wants to launch one version, it should offer “Industrial” version at $600 since the highest net contribution is generated by this version at this price.

To decide how many versions to be launched into market, combinations of two versions and the all three versions are considered. Since “Industrial” version brings the highest net total contribution, we want to include this version in all combinations. Thus, we have two options for the combinations of the two versions; “Student” and “Industrial”; and “Commercial” and “Industrial”. In option 1, we target the students with the “Students” version so it shou ld be priced as $50 to make students buy this version. Considering this price as constant at $50, the price for “Industrial” version should be set to ensure the large, multidivisional corporations; corporate R&D and university labs; and consultants and professional companies to prefer “Industrial” version over “Student” version. Because of the consumer would prefer the version with the higher consumer surplus, the surpluses should be calculated for the price decision. Exhibit 2A shows the consumer surpluses for each version at the optimal price within the product line. To determine the optimal price for the “Industrial” version, first we should calculate the maximum price. The maximum price is the price which makes the consumer surplus of the “Industrial” version to be equal to the consumer surplus of “Student” version where the consumer will be indifferent between two options. Thus, when the consumer is indifferent between two options, they can choose the upper version which has more features. Based on the calculations in Exhibit 2B, maximum price options are $2400, $1950 and $450. Among these options $1950 gives the highest net total contribution margin for the “Industrial” version, $12,655,000 (Exhibit 2C). The total net total contribution margin is turned out to be as $20,580,000 (Exhibit 2C) when the “Student” version is priced as $50 and the “Industrial” version is priced as $1,950.

In option 2, we target the consultants and professional companies; and small businesses with the “Commercial” version so it should be priced as $225 to make these segments buy this version. Considering this price as constant at $225, the price for “Industrial” version should be set to ensure the large, multidivisional corporations and corporate R&D and university labs to prefer “Industrial” version over “Commercial” version. The maximum price is the price which makes the consumer surplus of the “Industrial” version to be equal to the consumer surplus of “Commercial” version where the consumer will be indifferent between two options. Based on the calculations in Exhibit 2D, maximum price options are $1525, $1225 and $525. Among these options $525 gives the highest net total contribution margin for the “Industrial” version, $12,280,000 (Exhibit 2E). Since in the price option of $525, the consultants and professional companies may prefer the “Commercial” version which leads to a decrease in the total contribution, it is not determined as the optimal price. The total net total contribution margin is turned out to be as $16,080,000 (Exhibit 2E) when the “Commercial” version is priced as $225 and the “Industrial” version is priced as $1,525.

When we launch all three versions, “Student” version should be set as $50 to make students buy the product. We decided the price for “Industrial” version as $1,150 by considering the consumer surpluses. The maximum price options are turned out to be $150 and $100 for the “Commercial” version when the other two prices are taken as constant. $150 brings the higher total contribution for the “Commercial” version which is targeted to consultants and professional companies. In this option, “Student” version priced at $50 is targeted to students and small businesses whereas “Industrial” version is targeted to large, multidivisional corporations; and corporate R&D and university labs. Net total contribution is $16,580,000 (Exhibit 2F).

Among the options of the launch of the “Industrial” version only, the launch of both “Industrial” and “Student” versions, the launch of both “Industrial” and “Commercial” versions and the launch of all three versions; the highest total net total contribution ($20,580,000 ) is reached by the option of launching “Industrial” and “Student” versions. So the “Industrial” version should be priced at $1,950 and targeted to high-end segment consisted of large, multidivisional corporations; and corporate R&D and university labs whereas “Student” version is priced at $50 and targeted to students, small businesses and the consultants and professional companies.