Clearwater Technologies Essay Example for Free

Clearwater Technologies EssayClearwater set a per-seat manufacturers suggested retail legal injury (MSRP) that decreased with higher step seat purchases, reflecting the client perception of declining manufacturing cost per seat. Clearwater also cut this as advantageous because it encouraged nodes to increase their initial seat purchase. Clearwater typically sold its harvest-tides through value- annexed resellers (vars). A VAR was typically a wasted local firm that provided sales and support to end users.The value added by these resellers was that they provided a complete issue to the end user/client from a single point of purchase and had multiple information engine room products available from unhomogeneous vendors. Using VARs reduced Clearwaters sales and service expense signifi foottly and increased its commercialize coverage. These intermediaries operated in several steps. First, the VAR combined the QTX from Clearwater with database softw ar from other suppliers to form a turnkey customer solution.Second, the VAR loaded the software with customer-specific information and linked it to the customers existing sales history databases. Finally, the VAR installed the product at the customers site and trained the customer on its use. Clearwater sold the QTX to resellers at a 50 percentage discount from the MSRP, allowing the VARs to sell to the end user at or below the MSRP. The discount allowed the VARs room to accomplish with the customer and still achieve a profit. The Upgrade Initially, the expectation had been that the 30-seat unit would be the largest volume seller.In order to gain economies of scale in manufacturing, reduce inventory configurations, and reduce engineering design and testing expense to a single assembly, Clearwater decided to manufacture only the 30-seat server with the appropriate number of place enabled for the buyer. Clearwater was effectively giving away extra memory and absorbing the higher cost rather than manufac turing the various sizes. If a customer privationed a 10-seat server, the company shipped a 30-seat capable unit, with only the requested 10 seats enabled through software configuration.The proposed gain ground was, in reality, allowing customers to access capability already built into the product. Clearwater knew that more original customers were ready to use the additional capacity in the QTX. Some customers had added seats by acquire a second box, tho because the original product contained the capability to expand by accessing the disabled seats, Clearwater saw an opportunity to expand the product line and increase sales to a captive customer base. Customers could doubled or triple their seat capacity by purchasing either a 10- or a 20-seat upgrade and getting an access code to enable the additional number of seats.No other foe offered the possibility of an upgrade. To gain additional seats from the competitor, the customer purchased and installed an additional box. Becau se customers performed a significant amount of sufferance testing, which they would declare to repeat before switching brands, the likelihood of changing brands to add capacity was low. The objective of this mornings show fling off was to set the monetary value for the two upgrades. As QTX product manager Rob Erickson stopped to collect his entirely about recent notes from his desk, he reflected What a way to start the week.Every time we hasten one of these meetings, higher-ranking management only looks at margins. I spent the whole weekend cranking numbers and Im going in in that respect using the highest margin weve got today. How can anybody say thats too 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 crossing the lobby towards the conference room. She was pay heeding about the parley she had late Number MSRP to VAR building block Unit of Seats End User expense li ve* Margin** 10 $8,000 $4,000 $500 87. 5% 20 $14,000 $7,000 $700 90. 0% 30 $17,250 $8,625 $900 89. % put off 1 *Unit cost reflects additional $200 for memory capability for individually additional 10 seats. **Margin _ VAR Price _ Unit Cost VAR Price Number Original Original genuine 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 Hillary very clear instructions. I want you to go in and argue for the highest cost possible. We should absolutely maximize the profitability on the upgrade.The customers are already attached to us and they set about no alternative for an upgrade but with us. The switching costs to change at this point are too high since theyve already been trained in our system and software. Lets go for it. Besides, we in reality need to show some(prenominal) serious revenue generation for the year-end report to the stockholders. Hillary had not actually finalized a number. She figured she could see what the others proposed and then argue for a significant premium over that. She had the CFOs trade 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 thinking about the upcoming meeting and anticipating a long morning. I wish marketing would realize that when they come up with some grandiose number for a new product, sales takes the hit in the field. Its a killer to confuse to explain to customers that they have to ante up big bucks for something thats essentially built in. Its gonna be even tougher to justify on this upgrade. At least with the QTX, we have something the buyer can see. Its hardware. With the upgrade, there isnt even a physical product. Were just giving customers a code to access the capability thats already bu ilt into the machine.Telling customers that they have to pay several thousand dollars 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 comely 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 first I know we have to come 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 can 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 r eseller, and $8,000 to the end user. We keep the margin structure in place at the highest point in the line. The customer gets additional capacity, and we keep our margins consonant.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 come up with a simple, fair solution to set the upgrade that works for us and the customers. He walked over to a whiteboard and grabbed a markerIf we assume an existing 10-seat customer has decided to upgrade to 30-seat capability, we should charge that customer the difference between what the buyer has already paid and the price of the new capac ity. So . . . New 30-seat unit $17,250 Original 10-seat unit $8,000 Price for 20-seat upgrade $9,250 Its consistent with our true pricing for the QTX. Its fair to the customer. Its smooth 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 being 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 event of product failure, but the cost is pretty stiff. Upgrading becomes the discursive and affordable option. Hillary looked at the numbers and knew just what she was going to do. That 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 plenty and the customers result buy into, and Rob, you are charging even less than Br ian. 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 someone else. It would take too long. Theyve got no desire to make a change and that means weve got them. The sky is really 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 deuce-ace continued to argue the relative 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 more 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 accomplish 1. The pricing for the upgrades shouldnt undercut the existing prici ng 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 right, 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 get out any revenue on the table when buyers decide to buy more capacity. They are already perpetrate to us and our technology and we should capitalize 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, no(prenominal) of the prices youve put together thus far 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 remaining 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?