Clearwater Technologies

Clear Water Technologies A Case Study QTX is a sales stand out server that everyows binary users to simultaneously maintain their sales account databases. These databases covers contact information, quote histories, copies of all communications, and links to the clients corporate database for shipping records. The basic QTX package consists of a processor, chassis, impregnable drive, and network interface, with a manufacturing cost of $ five hundred. The package provided simultaneous approach shot for 10 users to the system, referred to as 10 position. Each seat represented integrity accessing employee. The intersection confidential information line consisted of 10-, 20-, and 30-seat capacity QTX servers. Each incremental 10 seats undeniable $cc of excess manufacturing cost. Yearly sales were at the rate of 4,000 building blocks crossways all sizes. In initial sales, approximately 30 pct of customers bought the 30-seat unit, 40 percent bought the 20-seat unit, and 30 pe rcent bought the 10-seat unit. Customers who needed more than 30 seats typically went to competitors servicing the medium-to-large company market segment.Clearwater set a per-seat manufacturers suggested retail outlay (MSRP) that decreased with higher quantity seat corrupts, reflecting the customer intelligence of declining manufacturing cost per seat. Clearwater also saw this as advantageous because it pull aheadd customers to increase their initial seat purchase. Clearwater typically sold its merchandises through value-added resellers ( volt-amperes). A volt-ampere was typically a small local firm that provided sales and support to give the sack users.The value added by these resellers was that they provided a complete solution to the end user/customer from a single point of purchase and had quadruplex information technology products available from mixed vendors. Using VARs reduced Clearwaters sales and service expense monumentally and increased its market coverage. Thes e intermediaries operated in some(prenominal) steps. First, the VAR combined the QTX from Clearwater with database softw be from other suppliers to form a piece of ass customer solution.Second, the VAR loaded the softw are with customer-specific information and linked it to the customers breathing sales history databases. Finally, the VAR installed the product at the customers site and clever the customer on its use. Clearwater sold the QTX to resellers at a 50 percent discount from the MSRP, allowing the VARs to sell to the end user at or to a lower place the MSRP. The discount allowed the VARs room to negotiate with the customer and legato achieve a profit. The Upgrade Initially, the expectation had been that the 30-seat unit would be the largest volume seller.In order to obtain economies of scale in manufacturing, reduce inventory configurations, and reduce engineering forge and testing expense to a single assembly, Clearwater decided to manufacture whole the 30-seat ser ver with the appropriate figure of seats enabled for the depraveer. Clearwater was effectively giving extraneous extra memory and absorbing the higher cost rather than manufacturing the various sizes. If a customer fateed a 10-seat server, the company shipped a 30-seat fitted unit, with only the requested 10 seats enabled through software configuration.The proposed stir was, in reality, allowing customers to access capability already construct into the product. Clearwater knew that many veritable customers were ready to use the additional capacity in the QTX. Some customers had added seats by buying a second box, simply because the original product contained the capability to develop by accessing the disabled seats, Clearwater saw an opportunity to expand the product line and increase sales to a captive customer base. Customers could double or triple their seat capacity by buy either a 10- or a 20-seat upgrade and getting an access code to enable the additional number of seats.No other competitor removeered the chess opening of an upgrade. To gain additional seats from the competitor, the customer purchased and installed an additional box. Because customers performed a signifi bunst amount of acceptance testing, which they would leave to repeat before switching brands, the likeliness of changing brands to add capacity was low. The objective of this mornings meeting was to set the set for the two upgrades. As QTX product manager Rob Erickson stopped to arrest his most recent notes from his desk, he reflected What a way to start the week.Every period we have one of these meetings, senior management only looks at margins. I spent the whole weekend cranking numbers and Im going in thither using the highest margin weve got today. How can anybody word thats as well as low? He grabbed his notes, calculator, and coffee and headed down the hall. From the other wing of the building, financial analyst Hillary Hanson was point of intersection the lob by towards the throng room. She was cerebration most(predicate) the conversation she had late anatomy MSRP to VAR unit of measurement Unit of Seats End User outlay Cost* Margin** 10 $8,000 $4,000 $500 87. 5% 20 $14,000 $7,000 $700 90. 0% 30 $17,250 $8,625 $900 89. % TABLE 1 *Unit cost reflects additional $200 for memory capability for apiece additional 10 seats. **Margin _ VAR Price _ Unit Cost VAR Price Number headmaster Original Actual Actual of Seats Unit Cost Unit Margin Unit Cost Unit Margin 10 $500 87. 5% $900 77. 5% 20 $700 90. 0% $900 87. 1% 30 $900 89. 6% $900 89. 6% TABLE 2 Friday afternoon with her boss, Alicia Fisher, Clearwaters CFO. They had been discussing this upcoming meeting and Alicia had given over Hillary very clear instructions. I want you to go in and fence for the highest price possible. We should absolutely maximize the profitability on the upgrade.The customers are already committed to us and they have no alternative for an upgrade but with us. T he switching costs to assortment at this point are too high since theyve already been trained in our system and software. Lets go for it. Besides, we in truth need to show some serious revenue generation for the closing report to the stockholders. Hillary had not actually finalized a number. She figured she could see what the others proposed and consequently argue for a significant premium over that. She had the CFOs backing so she could keep pushing for more. From the parking lot, Brian James, the district sales manager, headed for the rear entrance.He, too, was destineing about the upcoming meeting and anticipating a long morning. I like marketing would realize that when they dress up with some grandiose number for a new product, sales takes the hit in the field. Its a slayer to have to explain to customers that they have to pay big bucks for something thats essentially strengthened in. Its gonna be even tougher to vindicatoryify on this upgrade. At least with the QTX, w e have something the buyer can see. Its gruellingware. With the upgrade, there isnt even a physical product. Were just giving customers a code to access the capability thats already built into the machine.Telling customers that they have to pay several thousand clams never makes you popular. If you think about it, thats a lot of money for an access code, but you wont hear me say that out loud. Maybe I can get them to agree to something conjectural this time. I spent the weekend working this one out, and I think my logic is pretty solid. Price Proposals Once everyone was settled in the conference room, Rob spoke for the first time I realize we have to tot up with prices for both the 10-seat and 20-seat upgrades, but to keep things manageable, lets discuss the 20-seat price first.Once that number is set, the 10-seat price should be simple. Because the margin on the 30-seat unit is the highest in the line, I think we should use that as the basis to the price for the upgrade. He went to a whiteboard to show an example If a customer is upgrading from a 10-seat unit to a 30-seat unit, they are adding two steps of capacity costing $200 each to us, or $400. $400 /1-0. 90 _ $4,000 to the reseller, and $8,000 to the end user. We keep the margin expression in place at the highest point in the line. The customer gets additional capacity, and we keep our margins reproducible.He sat down feeling pleased. He had fired the first shot, had been consistent with the existing margin structure, and had rounded up the highest margin point in the line. Brian looked at Robs calculations and commented I think thats going to be hard for the customer to see without us giving away information about our margins, and we dont want to do that, since they are pretty aggressive to begin with. However, I think I have solved this one for us. Ive finally have intercourse up with a simple, fair solution to pricing the upgrade that whole kit for us and the customers. He walked over to a whiteboard and grabbed a markerIf we feign an existing 10-seat customer has decided to upgrade to 30-seat capability, we should charge that customer the deviation between what the buyer has already paid and the price of the new capacity. So . . . New 30-seat unit $17,250 Original 10-seat unit $8,000 Price for 20-seat upgrade $9,250 Its consistent with our current pricing for the QTX. Its fair to the customer. Its easy for the customer to understand and it still makes wads of money for us. It also is easy for the customer to see that were existence good to them. If they bought a 20-seat box in addition to the 10-seat box they already have, it would be costing them more.He wrote New 20-seat unit $14,000 A new unit provides customers with redundancy by having two boxes, which they might want in the pillowcase of product failure, but the cost is pretty stiff. Upgrading becomes the logical and affordable option. Hillary looked at the numbers and knew just what she was going to do. Th at all looks very logical, but I dont see that either of you has the companys best interests at heart. Brian, you just want a simple sale that your sales people and the customers will buy into, and Rob, you are charging even less than Brian. We need to consider the revenue issue as well.These people have already bought from us are trained on our hardware and software and dont want to have to repeat the process with somebody else. It would take too long. Theyve got no desire to make a change and that means weve got them. The sky is truly the limit on how much we can charge them because they have no real alternative. We should take this opportunity to really go for the gold, say $15,000 or even $20,000. We can and should be as aggressive as possible. All three continued to argue the relation back merits of their pricing positions, without notable success.Jefferies listened to each of them and after they finished, he turned to a clean whiteboard and took the marker. Ive done some mor e thinking on this. In order to meet the needs of all three departments, there are three very important points that the price structure for these upgrades must get 1. The pricing for the upgrades shouldnt undercut the existing pricing for the 30-seat QTX. 2. We want to motivate our buyers to purchase the maximum number of seats at the initial purchase. A dollar now is better than a potential dollar later. We never know for sure that they will make that second purchase.If we dont do this full, were going to encourage customers to reduce their initial purchase. Theyll figure they can add capacity whenever, so why buy it if they dont need it. That would kill upfront sales of the QTX. 3. We dont want to leave any revenue on the table when buyers decide to buy more capacity. They are already committed to us and our technology and we should take advantage on that, without totally ripping them off. Therefore, while Hillary says the skys the limit, I think there is a limit and we need to determine what it is and how close we can come to it.If we assume that those are the objectives, none of the prices youve put together thus farther answers all three of those criteria. Some come close, but each one fails. See if you can put your heads together and come to a consensus price that satisfies all three objectives. OK? Heads nodded and with that, Jefferies left the conference room. The three be occupants looked at one another. Brian got up to wipe the previous numbers off the whiteboards and said OK, one more time. If our numbers dont work, why not and what is the right price for the 20-seat upgrade?