EXAMPLE. We had the "baby Mac," then the iMac; it's now time for the "baby iMac.” As head of marketing of Apple Computer

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Example We Had The Baby Mac Then The Imac It S Now Time For The Baby Imac As Head Of Marketing Of Apple Computer 1 (77.17 KiB) Viewed 32 times

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EXAMPLE. We had the "baby Mac," then the iMac; it's now time for the "baby iMac.” As head of marketing of Apple Computer, you decided you can do bet- ter than the current situation. Last year, the company sold one million iMacs for $1,500 each. This is the most you can get from the market segment that cur- rently buys the iMac. According to a marketing study, there is a second market segment of two million people willing to pay up to $500 for a stripped-down version of the iMac. Your market researchers also tell you that (a) the first seg- ment would be willing to pay up to $800 for the stripped down version, (b) the second segment would be willing to pay no more than $600 even for the full-fledged version of the iMac. Finally, your production people tell you that it costs $300 to produce an iMac, be it the standard version or the stripped-down version. What is your optimal pricing policy? A first possible strategy (bench- mark) is to only sell the full version and charge $1,500. This would lead to selling one million units, for a total profit of (1,500 - 300) X 1m = $1.2 bn. A second possible strategy would be to hit each segment by charging $500 for the stripped-down version and $1,500 for the full version. But would this work? No: high-end consumers get zero value from buying the full version (it's priced

at exactly their value), but 800 - 500 = $300 from the stripped-down version. Thus they would buy the stripped-down version. An alternative strategy is to charge $1,200 for the full version (think of it as slightly less than $1,200) and $500 for the stripped-down version. This will lead high-end users to pay $1,200 and low-end users to pay $500. Total profit is now (500 - 300) X 2 m + (1,200 - 300) X 1m = $1.3 bn, an improvement over the current solution. What if production cost were $400?