Cambridge Software Corporation
CAMBRIDGE SOFTWARE CORPORATION
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
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