This paper analyzes the third run of a PDA product portfolio simulation, evaluating pricing and R&D allocation decisions for three products — the X5, X6, and X7 — over a four-year period (2006–2009). The analysis examines how price elasticity of demand and R&D investment interact to drive unit sales and total profit. The simulation achieved $1.907 billion in total profit, a 5.2% improvement over the prior run. The paper identifies a misstep in raising the X6's price and the resulting impact on sales saturation, then proposes a revised strategy with a gradual price reduction for the X6 while maintaining the successful $137 price point for the X7.
For this run of the simulation, the strategy revolved around two main dimensions. The first was that the price elasticity of demand for the X6 is relatively low. As a result, the price can be pushed higher. While this will decrease the number of units sold, it should increase total profit for the product. In this scenario, the upper bound was tested with a price increase to $450 for the first two years and to $460 in the following two years.
The X7 remains the key source of potential growth. Already, almost all R&D money has been shifted into this product. However, there is still room for growth above the $140 price point that was previously set. Assuming that price elasticity of demand is linear, the optimal price is close to that point, at $137. Any lower price will expand the customer base but will only serve to decrease overall profits associated with the product.
The decisions undertaken for this simulation are as follows:
X5: Price held at $250 for 2006–2008; R&D at 1% for those years, dropping to 0% in 2009. Discontinued in 2009.
X6: Price set at $450 for 2006–2007, rising to $460 for 2008–2009; R&D at 32% for 2006–2007, reduced to 1% for 2008–2009. Not discontinued.
X7: Price held at $137 for all four years; R&D at 67% for 2006–2007, rising to 98% in 2008 and 99% in 2009. Not discontinued.
The result of this strategy was a total profit of $1.907 billion, representing an improvement of 5.2% over the profit from the previous simulation. However, while the X7 strategy was a success, the X6 strategy was a failure. The price had been increased in the last two years under the theory that price elasticity of demand for the X6 was low. That appears to have been an error of interpretation. Indeed, the price of the X6 needs to be decreased rather than increased.
The X7 strategy was successful, resulting in profit increases of between 33% and 45% in the first three years, with a drop only in the final year. This strategy will, for the most part, be maintained. One area that may be subject to change involves R&D allocation. Consideration must be given to whether an increase in R&D in the early years will spur greater sales during 2008 and especially 2009 at the $137 price level. The R&D question, however, will ultimately be decided on the basis of the X6 model's needs rather than the X7 model's needs. This is because the X7 is believed to have price-driven demand, whereas the X6 is believed to have feature-driven demand.
For the X6, 2007 and 2008 saw minor decreases in profits, and the withdrawal of R&D financing in 2008 resulted in a major downshift in sales in 2009. At a lower price point, this decline may not have occurred. R&D appears to be a significant driver for the X6 model, given its premium market position. If it is to command premium prices — whether at $400 or $450 — it needs premium features. Thus, it should retain its R&D funding through 2008, since that shift did not have a substantial negative impact on the X7's profitability.
Turning to the price of the X6: raising the price during 2008 and 2009 was clearly a poor strategy. The loss of sales, especially in 2009, was significant, and even in 2008 profits decreased. A lower price point is therefore expected to generate higher sales for this product, particularly in the later years of the lifecycle. The strategy for the next simulation will remain largely the same, but with a lower final price for the X6 in order to spur sales as the product moves into maturity.
The revised year-by-year decisions are as follows:
X5: Unchanged — price at $250 for 2006–2008, R&D at 1%, discontinued in 2009.
X6: Price at $450 for 2006–2007, reduced to $440 in 2008 and $430 in 2009; R&D at 32% for 2006–2007, then 1% for 2008–2009. Not discontinued.
X7: Unchanged — price at $137 for all four years; R&D at 67% for 2006–2007, rising to 98% and 99% in 2008 and 2009 respectively. Not discontinued.
"Lower X6 price path and projected profit gains"
The biggest question remaining is whether or not the $137 price point is actually the optimal price for the X7. There is a risk to testing this further. Perhaps the X5 should also be evaluated — its price is set at a comfortable level but may not be fully optimized. For now, however, the main focus remains on spurring late product lifecycle demand for the X6 through measured price reductions and sustained R&D investment.
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