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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 Contribution1 = 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:
o Industrial version priced at $1949 to cater to the Large Corporations and Corp. Labs.
o 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