Cost-volume-profit analysis and tablet product lifecycle pricing strategy

Business Management

CTC Time Warp

Time warp 2 provided for increased knowledge regarding the market and the way in which CVP could be used to improve decision regarding prices. Time has reset and the CVP along with the results may be used to develop a more effective strategy. Adjustments to the strategy will be made learning from time warp 2.

The Strategy for 2012

The strategy will be considered on a year to year basis, as managing product lifecycles will require some changes across the years. In 2012 there will be a change in strategy; in time warp 2 the price of the X5 was reduced to $270, with the aim of increasing sales, and R&D budget was reduced to zero due to the lifecycle stage. In this time warp a similar strategy will be pursued; reducing the price and keeping the R&D budget at zero. To increase sales and potential benefit from sales during the remaining life the price may be reduced further than seen in time warp 2, and it was found in the past time warp that customers for the X5 were highly price sensitive, which leads to a level of elasticity that indicates decreasing the price may create a disproportionate increase in sales. In time warp 3 the price will be reduced to $220, leaving a low profit per unit, but making it more attractive to a price sensitive market. R&D will be reduced to zero.

The X6 is an important model, as there is a potential market of 6,000,000 remaining. The X6 is likely to be attractive to the market as it has a higher level of performance than the X5, and it stands up well to the competition. As this is a premium product the pricing should reflect is position, and as it is stated that the market for this product care more about performance than price, it may be argued there is the potential for a price increase, this was the strategy used in the past. However, in the past time warps the price increase in the X6 has not resulted in sufficient levels of long-term growth, so this time the price will be left at the 2011 level of $430. While the market information indicates that the market is not price sensitive, it does not mean they completely disregard price, so the product has to remain competitive, this price level may help to gain more market share and market momentum. A further change will be made to the R&D budget compared to time warp 2. The X6 has been on the market for 2 years, and as such a significant increase in the R&D budget may be misplaced; it may present a high opportunity cost. The marketing budget will stay at 34% will allowing development for an established product to be undertaken, without overspending.

The X7 is a new product, which has only been on the market for a year. In the past scenario the CVP was used to assess an optimum level of production to maximize revenues. However, there is also the need to recoup the sunk costs, and the product is new, which means that although the CVP analysis is useful, the new product may benefit from a more strategy use of pricing strategy. In this market the consumers care about both cost and performance. Price can be seen as a part of a positioning strategy, so for 2012 there will be the continuation with the higher price, this is still below the X5 price level. However, the R&D budget will not be increased above the 2011 level. Just because an R&D budget is available does not mean it should be used; this is a product that has already been developed and is on the market, the existing budget will allow for the continued development for a product that is already on the market. This gives the following

Table 1; Strategy for 2012

Selling Price

Proportional R&D Budget

X5

0%

X6

34%

X7

33%

The Strategy for 2013 & 2014

The first major change from time warp 2 is the discontinuing of the X5 in 2013. It has high overheads, and the X7 may be a suitable replacement for those who wish to replace it. The price for the X6 will remain at the same level as 2012, as this market is not price sensitive, the R&D budget will also remain at the same level as 2012, as the product appeared to remain competitive, and as such should continue to receive support to remain competitive.

The X7 is now at a stage where it needs to grab some market share. It is likely to be seen as a premium product in the range following the higher pricing supporting a premium positioning. Now the company need to act to gain a higher level of the market, reducing the price to $99 should get the attention, and should increase sales.

Table 2; Strategy for 2013 & 2014

Selling Price

Proportional R&D Budget

X5

Discontinued

X6

$430

34%

X7

$99

33%

The Strategy for 2015

In 2015 it appeared that the X6 was reaching the shake out phase, and in time warp 2 it was still selling well, so the price for this product will remain the same. However, as it is nearing the probable end of its lifecycle, the R&D budget will be cut to zero, in readiness for discontinuing the product in the near future.

The X7 price will be maintained at the $99 level, with the elasticity indicating the lower price for the product is likely to result in an increase in overall revenues, even if the profit per unit is lower than was initially desired. The R&D budget for the X7 is not increased, but the existing level is maintained to support the product.

Table; Strategy for 2015

Selling Price

Proportional R&D Budget

X5

Discontinued

X6

$430

0%

X7

$99

33%

The strategy that can be applied is likely to help support profit making by adapting prices and support for the products based on their lifecycle, and while the CVP is used, other issues, such as pricing strategy are also used to improve the strategy.