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If it is to command premium prices -- which will be the case no matter if the price is $400 or $450 -- it needs to have premium features. Thus, it should retain its R&D through 2008, since that move did not have a substantial impact on the X7's profitability. This brings us to the price of the X6. Clearly, raising the price higher during 2008 and 2009 was a poor strategy. The loss of sales, especially in 2009, was significant and even in 2008 profits decreased. Thus, a lower price point is expected to generate higher sales for this product, particularly in the later years (2008 and 2009). Thus the strategy for the next simulation will remain largely the same but with a lower final price for the X6 product in order to spur sales as the product moves into maturity.
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 % 1
R&D % 0
Discontinue-N
Discontinue? N
Discontinue? N
Discontinue? Y
X6
Price $450
Price $450
Price $440
Price $430
R&D % 32
R&D % 32
R&D % 1
R&D % 1
Discontinue? N
Discontinue? N
Discontinue? N
Discontinue?...
If the $450 pricing was restored, that would give back approximately $54 million of profit that the price increase cost us. Restoring the R&D in 2008 and lowering the pricing to more attractive price points in 2008 and 2009 should spur greater demand. The product reached only 78% saturation, compared with the 98% saturation that was achieved during the base case scenario. At a higher price point than the base case of $400, it is unlikely that 98% can be achieved, but a figure higher than the 79% recorded in Sim II can be expected. A figure in the 85% range will result in 330,000 additional sales, which at the new 2008 and 2009 price points is in the range of a further $7.755 million in profit.
The biggest question remains at to whether or not the $137 price point is actually the optimal point for the X7. There is a risk to testing this further. Perhaps the X5 should be evaluated -- its price is set at a comfortable level but it may not be entirely optimized. For now, however, the main focus will be on spurring late life cycle demand for the X6.
Discontinue? N
The results of this new strategy are expected to be roughly the same, but erasing some of those profit losses with the X6 product. If the $450 pricing was restored, that would give back approximately $54 million of profit that the price increase cost us. Restoring the R&D in 2008 and lowering the pricing to more attractive price points in 2008 and 2009 should spur greater demand. The product reached only 78% saturation, compared with the 98% saturation that was achieved during the base case scenario. At a higher price point than the base case of $400, it is unlikely that 98% can be achieved, but a figure higher than the 79% recorded in Sim II can be expected. A figure in the 85% range will result in 330,000 additional sales, which at the new 2008 and 2009 price points is in the range of a further $7.755 million in profit.
The biggest question remains at to whether or not the $137 price point is actually the optimal point for the X7. There is a risk to testing this further. Perhaps the X5 should be evaluated -- its price is set at a comfortable level but it may not be entirely optimized. For now, however, the main focus will be on spurring late life cycle demand for the X6.
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What assumptions did you make when you planed your strategy? Did these assumptions prove to be right, or was there something else you didn't think about that influenced your results? How will taking those factors into account affect your strategy in this upcoming run? Again, you need to crunch some numbers to determine how successful you were, where the greatest sources of profit are, and what changes make sense. Make
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