Warp the Four-Year Strategy Set Capstone Project

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It was believed that a feature-rich product would have a relatively low price elasticity of demand. The previous management team had understood that the utility was low, but assumed a policy of price reduction in response. I viewed the solution to low utility was to improve the product. This would allow us to raise the price and still see strong sales. This is what occurred. It was hypothesized that a price in the range of $430-$450 would see profit optimization. The $450 was tested and it showed a clear improvement over the X6 performance under Joe Schmoe despite a decline in unit sales. It was believed profit would increase by $31.53M in 2008; in reality this came out to an increase of $144.87M in 2008 and $64.061M in 2009, both figures far better than expectations. The key to future improvement of the X6 will be finding the optimal point for the price of this product. Armed with some information about its price elasticity of demand, that point can be determined with more accuracy. It is worth noting that the product achieved 96% saturation even at the $450 price range, compared with Joe's 98% at $400.

The X7 saw a lower price in order to stimulate sales. It finished 2009 under Joe Schmoe with 13% market saturation and profits in 2008 and 2009 of $53.8 million and $91.7 million respectively. The lower price was intended to stimulate significantly stronger demand, as there are 15 million potential customers. Joe Schmoe only reached 2 million of these. With the lower price, I reached nearly 5 million customers for a market saturation of 32%. While this is a fairly small number, it is a significant improvement over Joe's numbers.

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Profits under my strategy were $176.6 million in 2008 and $348.5 million in 2009. Clearly, where Joe was unable to move this product beyond the introduction stage, I was able to push it into the stronger growth stage. It is possible that if the X7 can be moved up a year in the product life cycle by 2009, the four-year profit could be much higher than the current level even. This would give the product a saturation rate over 50%. There is still significant contribution margin (the variable costs are $60 per unit and the selling price is $150 per unit) to cut the price and spur further sales.

From here, the best strategy would be to continue to evaluate the price points. The hypothesis that little can be done to change the X5 appears to have held true, with the one big move being to discontinue it after 2008. The X6 and X7 should have their prices optimized. It is also possible that the R&D component could be optimized as well. The impact of the tradeoffs with regards to this option may not be as strong or as obvious as they were with the X5 and X6, so more caution may be taken when conducting this analysis.

However, as all of the major strategies that were suggested worked, the most important thing from this point is to focus on tweaking the existing strategies in order that they may be optimized. Elasticities may be studied now that better information exists. This will help to ensure the best possible price points. The….....

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