It is not expected, however, that elasticity is perfectly linear. It is worth testing the upper bound here, to see how high a price can be supported by the market.
With the X7, the most important number is the final market saturation figure of 37%. There is room for growth here. The cost of goods sold is $65. Thus, $65 is the lower bound on pricing for the X7. We just need to find the point that maximizes profit -- this may not be saturation. We knocked $50 off the price and grew the sales by 5.388 million, so roughly 107,760 new customers for every dollar off. This can be used to find what should be the optimal price (if elasticity is linear, which it probably is not). Peak revenue is at around $105-106; peak contribution at $138-137 (see Appendix a), which gives us another million or so units. So the price will be set there for the X7.
The strategy for the SLP 3, therefore, will be as follows:
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 % 0
R&D % 0
Discontinue-N
Discontinue? N
Discontinue? N
Discontinue? Y
X6
Price $450
Price $450
Price $460
Appendix a: Contribution for X7 estimates
Price
Decrease
Estimated Sales
Revenue
VC
Total Contribution
To run this simulation again, it is clear that the R&D for the X6 must be maintained. In terms of fundamental business theory, this makes sense. The X6 is a premium product, and the demand for this product is more likely to be derived from features than from price. This was learned early when it was determined that price elasticity of demand was low. Elasticity of demand from features was
At a lower price point, this may not have happened. However, R&D seems to be a significant driver for the X6 model, since it has a premium position in the market. 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
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