Introduction:
Clearwater Technologies was formed by four MIT graduates. The Company deals in customer relationship management servers and focused on providing its services to small to medium sized companies only. The Company is operating in multiple products but QTX is the most successful product and major revenue earner for the company (Susan F. Sieloff and R. M. Kinnunen, 2007). QTX sales represent more than 50 percent of company’s total sales. Clearwater products are known for high reliability with life time technical support at no cost. As QTX is major revenue source for the company, the cash flows from the product and its market share is always on priority for management (Susan F. Sieloff and R. M. Kinnunen, 2007).
Presently company is dealing with three variations in products; 10 seats, 20 seats and 30 seats. Originally company manufacture only 30 seats product but depending upon the need of customer’s, engineers customized the product by locking extra seats. Customer can update the existing product to higher number of seats depending upon the need at very nominal cost. The product can only be update in lot of 20 seats or 30 seats (Susan F. Sieloff and R. M. Kinnunen, 2007).
Presently the product flow starts from the manufacturer. Manufacturer develops product and handover the products to Clearwater and from Clearwater, the product goes to value added resellers (VARs). From value added resellers, it reaches to the customers (Susan F. Sieloff and R. M. Kinnunen, 2007). Value added resellers are responsible for product installation and training of customer at customer site and also for providing other customer support services. The Company is having manufacturer’s suggested retail price (MSRP) per seat that proportionately decrease with increasing number of seats(Susan F. Sieloff and R. M. Kinnunen, 2007). Companies pricing strategy is focused on to sale 30 seats product in first go. Existing prices and margins of the company are as follow:
Presently company is only supplying 30 seats products so company’s margins get reduced if they sell 10 seats or 20 seats products.
Problem Background:
Senior management of Clearwater is looking forward to an opportunity to upgrade customer’s products from 10 seats to 20 or 30 seats. They want to finalize the pricing strategy of product for long time but due different views of different departments they are unable to finalize a pricing strategy for QTX up gradation (Susan F. Sieloff and R. M. Kinnunen, 2007). All three departments involve in finalizing the strategy have different opinion product manager does not want much change in existing price whereas sales manager wants price lower to maximize the sales and financial analyst want price as high as possible to generate more revenue.
All three departments presented their pricing strategy to senior management. Product manager and sales manager formulated their strategy around existing prices whereas financial analyst just mentioned some wage numbers very high from existing pricing, without any proper analysis on pricing strategy. After listen to their strategy senior management mentioned three points and told that pricing strategy should follow all three points. Three points mentioned by him are:
Pricing should not be lower than existing 30 seat pricing. Strategy need to be focused on motivating buyer to purchase 30 seats QTX at initial stage.
Pricing strategy should able to en-cash existing commitment of the customer. When customer is happily using our product and have trained staff for that, we should not leave any money that can be taken out from the customer. But one thing we need to keep in mind that it should not be too high (Susan F. Sieloff and R. M. Kinnunen, 2007).
Now the challenge in front of all three department is to finalize a strategy that is in favor of all three department and yet acceptable to senior management and customer.
Pricing Strategy:
Factors Need to Consider -
Prices of any product not only limited to manufacturing cost, it depend on various factors. Before finalizing pricing strategy for any product company need to do a proper analysis of different variables that influence the decision of customer to make final purchase of product.
There are various factors that impact the final pricing of the product. The factors are:
1. Positioning – for any pricing it is very important that what positioning product is holding. If Clearwater positioned itself as best services at premium cost, it can not charge very less price than its competitors. It is very important to finalize the prices in line with positioning of the product. In the given Clearwater is already known for premium priced so it is not require lowering the prices. Lowering the prices will conflict with the image and customer may think that company is compromising on the quality or service of the product. Clearwater products are very reliable in the market and people are ready to pay.
2. Demand Of the Product – another very important factor mangers need to consider is impact of pricing on the demand of the product. Potential pricing should not reduce the demand of the product. Pricing strategy should consider the negative and positive impact on the demand. Company always does pricing to increase the sales and revenue from the product. Before finalizing any pricing it is recommended to do some market research on the potential prices. A small sample group representing the overall customer population can be target to answer the impact of potential prices on the demand. Market research will help in understanding price sensitivity of the customer. In the given case the scope of conducting a market research is nil so we need to analyze the price sensitivity of customer from existing literature and information. Based on the information available we can say that price sensitivity for products is comparatively low as customer is more focused on product quality and after sales services. Existing and potential customers may not find it difficult to afford a little higher price for the product that is known for its reliability and services.
3. Cost – before finalizing the prices of the product it is important to calculate all cost variable and fixed linked with the product. In the given case we are aware with manufacturing cost of the product and for other cost company give 50 percent margins to value added resellers. Therefore we can say that for the company effective prices can be finalized only keeping in mind the manufacturing cost, any other cost incurred while promoting the product and incurred during forming or selecting value added resellers. In the given no information is provided on the cost company is incurring on marketing communication activities. Even managers who are developing pricing strategy did not consider this cost.
4. Environmental Factors – there are various environmental factors that influence cost of product. The environmental factors vary from place to depending upon the government policies and laws. The cost related with environment factors also need to be calculated and adjusted while deciding final prices of the product.
Pricing Objectives
Company’s pricing objectives also play important role while determining pricing strategy. Clearwater pricing objectives are to maximize revenue by increasing the prices of existing products and increasing the sales of 30 sets product .
After calculating all cost involved in various factors and making company’s objective clear now we will adopt a suitable method to calculate final pricing of the product. The product can play on high volume and low price strategy and cost plus and target return strategy will also not be applicable in this case . The product involves high margins and great reliability so the most suitable pricing strategy for the product would be value based pricing. The product is well established in the market and known for its reliability and service. Value based pricing work in reverse direction as given in below diagram:
The pricing starts from the product value perceived by the customer. This method calculates maximum margins on the product and offer huge variance in actual cost and selling price of the product. This process also called price for performance .
Final Prices of the Product:
In the given case management can look forward to following option of pricing strategy:
Keeping in mind the three major points mentioned by senior management the costing of the product can be done in following manner (Belk, 1975).
In both the cases the margins on 10 seats QTX has been increased by $ 1000 whereas increased on 30 seats QTX is very minimal and customer will not mind paying extra $ 250. Company may justify this price increase due to increased cost of raw material, manpower and services (Belk, 1975).
The new prices are not cutting down existing prices and also motivating buyer to purchase 30 seats product. Now we will focus on pricing should be adapted to upgrade the existing QTX system from 10 seats to 20 seats and 30 seats and from 20 seats to 30 seats.
The up gradation of existing system need not be cheaper than existing purchasing price of the system because if customer will be able upgrade his existing QTX system at lower rate he will buy low seat capacity QTX and later on upgrade it. While deciding the prices again we need to motivate customer to switch from 10 seats to 30 seats. So the offer could be as follow:
If customer want to switch from 10 seats to 20 seats the charges will be - $ 7,000
If customer want to switch from 10 seats to 30 seats the charges will be - $ 11,000
If customer want to switch from 20 seats to 30 seats the charges will be - $ 7,000
Clearwater may justified these charges by saying that if customer is having 10 seats and will purchase new system of 10 seats it will cost him $ 9,000 whereas in up gradation company is offering him a discount of $ 2,000 and charging him only $ 7,000. In other case where customer is increasing 20 Seats Company is charging only $ 11,000 whereas new system will cost him $ 14,500 so Clearwater is offering him a discount of $ 3,500.
The above mentioned pricing strategy very clearing discouraging the purchase of 10 seats QTX and promoting 30 seats QTX. This pricing strategy is also not cutting the existing prices of 30 seats QTX. Charging an amount of $ 15, 000 or $ 20, 000 can not be justified because that will be too high and in that amount company can install a complete new system. Very high prices will reduce even the existing sales and also tarnish the existing image of company.
Clearwater needs to be very logical and competitive in their prices. So far company has performed a good job by providing good products and services and this trend should keep on going in future. Above mentioned prices will not bring difficulties for any department and customer will also understand the pricing. Since no other company is providing up gradation facility in existing system, it will be difficult for customer to compare the prices of upgrading the QTX. The only comparison he can do is to compare up gradation prices with the prices of purchasing a new system and in that case company is already offering the up-gradation at much lower cost than purchasing a new system.
Conclusion:
References
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