Establishing a Price and R&D strategy for the PDAs - Essay Example

PDA SIM Run Number Strategy In establishing a price and R&D strategy for the PDAs, it is first necessary to analyze the existing lineup. The X5 increased market share last year by 83%. The market share is currently 31% and the goal is to sell an additional 2 million units this year. The product has not reached saturation point even though it has been on the market for 3 years. It may be entering a mature stage where new R&D money would not be returned in revenue. Since the X5 appeals to the consumer base that shops for price, the strategy will involve cutting back on R&D spending on the X5 and lowering the price to garner more market share. The X6 is the high end product in its second year of production. This consumer segment shops for performance and increasing the R&D expense should be able to be offset by an associated increase in price. The goal will be to raise the market share to 30%, which will require sales of approximately 1 million units. The X7 is a new entrant that is a combination of attractive price and performance. Currently it is priced at $200 and is the lowest cost PDA in the lineup. Increasing the sales on the X7 should result in lowering the marginal cost and increasing the profit. Last year it lost money due to low sales. According to Pete Cunningham, senior analyst at Canalys, "With the rapid increase in demand for new features and services, smartphones are migrating into the higher volume, mid-range market segments" (qtd. in "Symbian Fast Facts Q4 2007"). It will be assumed that the smartphone and the PDA has similar market dynamics. The strategy question becomes, can we increase price and market share As a compromise, the price will be increased moderately and R&D spending increased significantly. The beginning scenario: X5 Price $200 R&D 5% X6 Price $450 R&D 42% X7 Price $225 R&D 53% Run Number 1 Outcome and Analysis The outcome for run number 1 was $965,929,406. One of the problems with the strategy was that after lowering the price to $200, it hit saturation the next year. During the next run, the X5 strategy will be to only reduce the cost to $225 and discontinue the product after the first year. Run Number 2 One of the problems with this strategy was that the X7 never gained the market share that was expected. The theory is that the X7 needs more R&D money allocated to get the performance necessary to gain market share. Part of the strategy will be to recover the increase in R&D costs of the X7 by increasing the price. In addition, the X6 began to lose sales in the fourth year. The new strategy will be to raise the prices on the X6 and X7 at $450 and $250, but decrease the X6 R&D funding, while increasing the R&D on the X7. This is based on the theory that the older and more mature X6 product will not benefit as much from R&D as the newly developed X7. During this run, the X& R&D will increase when the X5 is discontinued as there is a price similarity and the X7 is a newer and better performing product. The beginning scenario: X5 Price $225 R&D 5% X6 Price $450 R&D 35% X7 Price $250 R&D 60% Outcome and Analysis Run Number 2 The profit from run number 2 was 1,048,169,006. This was only marginally higher than run number 1. One of the problems encountered was that the X6 began to lose sales volume during the third and fourth year as it began to saturate the market during the third year. In addition, the X7 sales never caught on, even with the increase in R&D. Run Number 3 Strategy For run number 3, I used the strategy from run number 2 with the following changes: Reduce the price on the X7 and increase its R&D spending. Decrease the R&D on the X6 after the 2nd year. Also, the price will be reduced on the X6 at that time. The beginning scenario: X5 Price $200 R&D 5% X6 Price $450 R&D 30% X7 Price $200 R&D 65% Outcome and Analysis Run Number 3 The profit from run number 3 was 1,156,812,698. This was the highest to date and was approximately 20 percent above the original simulation. The X7 sale volume rose as anticipated, though the X6 fell off during the fourth year. This was due to the product reaching maturity and gaining over 80 percent market share. There were simply not enough new customers to continue to support new sales. Overall Process Analysis There is a careful balance and correlation between the money spent on R&D and product sales. Sales is also affected by price. During the early stages of a product, research and development can improve the product and increase sales. However, as was shown with the X7, the increased R&D costs may not be recovered by an increase in price. The more effective strategy was to have the improved performance drive an increase in sales. As a product reaches maturity, the market saturation makes R&D an unwarranted expense. As was seen on the low cost X5, after 4 years on the market there were too few new customers to fuel an increase in sales. At this point the product needs to be discontinued. The X6 was affected by this same influence in its last year. Reducing the price on the X6 during the last year did not increase revenue. The X7 was an interesting case as it was a relatively new product when the simulation began. By increasing the money spent on R&D, it was able to capture the market that was looking for performance. In addition, the price was kept low (the lowest priced unit in the lineup) to attract the segment that shops for price. The last run, the X7 did considerably better than in the 2 previous runs. This was a direct result of the strategy of making more features and performance available at the same price. In conclusion, the process indicated that R&D money spent early in a products life is a better return than cutting price. It also indicated that product improvement costs are recaptured through an increase in sales volume and not from increasing the price. These strategies stayed consistent, though the timing was critical to their success. One of the most important lessons learned from this exercise was the importance of timing in the marketing and development of a technology product. Works Cited "PDA Sim." . 2006. Forio. 21 Feb. 2008 . "Symbian Fast Facts Q4 2007." . 2008. Symbian. 21 Feb. 2008 . Read More