Clearwater Technologies

Clear Water Technologies A Case Study QTX is a gross deals support server that anyows multiple users to simultaneously maintain their gross revenue 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, hard drive, and network interface, with a manufacturing terms of $ vitamin D. The package provided simultaneous access for 10 users to the system, referred to as 10 pose. Each seat represented adept accessing employee. The increase line consisted of 10-, 20-, and 30-seat capacity QTX servers. Each incremental 10 seats required $cc of additive manufacturing woo. Yearly sales were at the rate of 4,000 social units across all sizes. In initial sales, approximately 30 part of customers bought the 30-seat unit, 40 percent bought the 20-seat unit, and 30 percent bought the 10-seat unit. Customers who need ed more than 30 seats typically went to competitors servicing the medium-to-large company grocery store segment.Clearwater set a per-seat manufacturers suggested retail hurt (MSRP) that decreased with higher step seat purchases, reflecting the customer perception of declining manufacturing cost per seat. Clearwater also saw this as advantageous because it encouraged customers to maximize their initial seat purchase. Clearwater typically sold its products through value-added resellers ( volt-amperes). A VAR was typically a depressed local firm that provided sales and support to end users.The value added by these resellers was that they provided a complete firmness of purpose to the end user/customer from a single point of purchase and had multiple information engineering products available from various vendors. Using VARs reduced Clearwaters sales and service get down signifi stoogetly and increased its market coverage. These intermediaries operated in several steps. First, the VAR combined the QTX from Clearwater with database softwargon 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 percent 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 bring off 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 frame to s in additionl 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 seats enabled for the emptor. Clearwater was effectively grownup away extra memory and absorbing the higher cost rather than manufacturing the various sizes. If a customer wanted a 10-seat server, the company shipped a 30-seat capable unit, with only the requested 10 seats enabled through software configuration.The proposed upgrade was, in reality, allowing customers to access capability already built into the product. Clearwater knew that many pilot customers were ready to use the additional capacity in the QTX. Some customers had added seats by buying a second box, only because the original product contained the capability to expand by accessing the disabled seats, Clearwater saw an fortune to expand the product line and increase sales to a captive customer base. Customers could double or triple their seat capacity by purchasing either a 10- or a 20-seat upgrade and getting an access write in code to enable the additional number of seats.No other competitor offered the possibility of an upgrade. To gain additional seats from the competitor, the customer purchased and installed an additional box. Because customers performed a significant amount of acceptance testing, which they would digest to parallel before switching brands, the likelihood of changing brands to add capacity was low. The objective of this mornings meeting was to set the toll for the two upgrades. As QTX product manager thieve Erickson stopped to collect his most recent nones from his desk, he reflected What a way to start the week.Every time we have superstar of these meetings, senior management only looks at valuation reserves. I spent the whole weekend cranking numbers and Im going in there 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, pecuniary analyst Hillary Hanson was crossing the lobby towards the conference room. She was estimateing about the conversation she had late Numb er MSRP to VAR Unit Unit of Seats End User scathe 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 $cc for memory capability for each additional 10 seats. **Margin _ VAR Price _ Unit comprise VAR Price Number Original 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 future meeting and Alicia had given Hillary very clear instructions. I want you to go in and advocate for the highest outlay 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. 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 really need to show just about serious tax revenue generation for the year-end report to the stockholders. Hillary had not actually finalized a number. She insured she could protrude what the others proposed and then argue for a significant premium over that. She had the CFOs backing so she could pass on move 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 relish morning. I wish marketing would realize that when they condescend up with some grandiose number for a new product, sales takes the hit in the field. Its a killer to have to explain to customers that they have to constitute 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 ironware. With the upgrade, there isnt even a physical product. Were just giving c ustomers a code to access the capability thats already built 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 reasonable 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 dwell 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 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 c osting $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 structure in abode at the highest point in the line. The customer gets additional capacity, and we keep our margins consistent.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, charming solution to price the upgrade that works for us and the customers. He walked over to a whiteboard and grabbed a signIf we study 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 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 compact 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 logical 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 people and the cus tomers 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 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 iii 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 do 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 pri cing 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 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 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 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, none 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?