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F11MKT300_Pricing2 - Pricing(Lecture 2 Pricing for Multiple...

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Pricing (Lecture 2) Pricing for Multiple Versions Incremental Breakeven Analysis
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Pricing for Multiple Product Versions To simplify things, assume $X=0, so that Value=WTP Example: Accounting Software 2 segments of customers N1 accountants and N2 casual users All software development costs are sunk Unit variable cost is zero Suppose the firm has only 1 Product called Premium WTP (accountant) = $200
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One Product Version 2 possible prices to maximize profits: $200 and $50 If Price = $200 Only the accountants will buy Profits = $200 x N1 If Price = $50 Both the accountants and casual users will buy Profits = $50 x ( N1 + N2 )
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One Product Version Compare Profits under the 2 price points: 50 N1 + 50 N2 > 200 x N1 => 50 N2 > 150 N1 If N2 > 3 N1 , price it at $50, otherwise price it at $200. E.g., if N1 = 1 million and N2 = 2 million, you should set the price at $200 and receive profits of
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Two Product Versions (1) To simplify things, suppose there are 1 million accountants and 2 million casual users The company creates a low-end version called Standard . Unit variable costs are assumed to be zero (just to make the math simple).
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