Optimize Pricing Model for a Tech Product in a Highly Saturated Market
Instruction: Use the fictional software business below. Calculate revenue, contribution and operating surplus for the current price and two proposals. Find the customer count each proposal needs to match current contribution, then recommend what to test and what evidence is missing.
A software product has 200 paying customers at $50 per customer per month. Variable service cost is $10 per customer per month and fixed operating cost is $6,000 per month. Proposal L charges $40 and forecasts 260 customers; proposal H charges $60 and forecasts 180. These volume forecasts are unvalidated hypotheses. Assume variable cost per customer and fixed cost stay unchanged for this exercise. Exclude taxes, financing and one-time transition costs. A competitor advertises $35, but its usage limits and service terms have not been checked.
Updated
Official answer available
Read the opening below, then unlock the full answer and practical guidance.
The current monthly revenue is 200 × $50 = $10,000. Variable cost is 200 × $10 = $2,000, so contribution is $8,000. After the stated $6,000 fixed operating cost, the simplified operating surplus is $2,000.
At $40 with 260 customers, revenue would be $10,400 and contribution $7,800, leaving $1,800. More customers and revenue would still produce a lower surplus. At $60 with 180 customers, revenue would be $10,800 and contribution $9,000, leaving $3,000...