PDA SIM II the Strategy Capstone Project

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5 cents, so you lose $7,500 in contribution for every $1 you increase the price but you gain. This hints that price elasticity of demand is relatively low for this product, perhaps lower than previously believed. Increases in price will result in reduced sales figures but can be expected to bring in more profit as well. It is not expected, however, that elasticity is perfectly linear. It is worth testing the upper bound here, to see how high a price can be supported by the market.

With the X7, the most important number is the final market saturation figure of 37%. There is room for growth here. The cost of goods sold is $65. Thus, $65 is the lower bound on pricing for the X7. We just need to find the point that maximizes profit -- this may not be saturation. We knocked $50 off the price and grew the sales by 5.388 million, so roughly 107,760 new customers for every dollar off. This can be used to find what should be the optimal price (if elasticity is linear, which it probably is not). Peak revenue is at around $105-106; peak contribution at $138-137 (see Appendix a), which gives us another million or so units. So the price will be set there for the X7.

The strategy for the SLP 3, therefore, will be as follows:

Year by Year Decisions: Pricing & R&D Allocations

2006

2007

2008

2009

X5

Price $250

Price $250

Price $250

Price n/a

R&D % 1

R&D % 1

R&D % 0

R&D % 0

Discontinue-N

Discontinue? N

Discontinue? N

Discontinue? Y

X6

Price $450

Price $450

Price $460

Price $460

R&D % 32

R&D % 32

R&D % 0

R&D % 0

Discontinue? N

Discontinue? N

Discontinue? N

Discontinue? N

X7

Price $137

Price $137

Price $137

Price $137

R&D % 67

R&D % 67

R&D % 100

R&D % 100

Discontinue? N

Discontinue? N

Discontinue? N

Discontinue? N

The default run was easy to beat. The X5 lost a lot of money in the final year and the X7 had very little market saturation.

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It is believed that the optimal price point for the X7 is actually lower than where I set it, so that will be pursued. Any lower than $137 is believed to reduce total profit for the product. The X5 is a stable product and any gains there will be in the single millions. There is room for improvement in the performance of the X6, however. Raising the price in the latter years is believed to be the best course of action. However, if elasticity proves to not be linear, then an estimate of elasticity will be taken from the two….....

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