Clearwater Technologies Case Analysis

Clearwater Technologies Case Analysis

Megan Strabo

May 23, 2016

Situation

Clearwater Technologies, Inc. is the market share leader in CRM servers for sales staff of small to medium sized companies. It was founded by four MIT graduates who saw an opportunity to serve a portion of the market ignored by larger firms. Clearwater customized the QTX, a sales support server that allowed multiple users to simultaneously maintain their sales account databases, for companies with sales forces of 10 to 30 people. The basic QTX package provided simultaneous access for 10 users to the system (referred to as 10 “seats”) and consisted of a processor, chassis, hard drive, and network interface with a manufacturing cost of $500. Being the first to market in this particular segment, QTX sales represented $45M of its $80M sales in 2004. The QTX line held 70% of its mature market. Clearwater sold its products through small local firms that provided sales and support to end users called Value Added Resellers (VARs). QTX servers were sold to resellers at a 50% discount from the manufacturer’s suggested selling price (MSRP), allowing VARs to sell to the end user at or below the MSRP. Initially, the expectation was that the 30-seat unit would be the largest volume seller. So, Clearwater manufactured only 30-seat servers with the appropriate amount of seats enabled for the buyer. Since the original product consisted of the capability to expand by accessing disabled seats, Clearwater had an opportunity to expand their product line and increase sales by offering 10 or 20-seat upgrades and making access codes available to enable the additional number of seats.

Issue/Problem

Clearwater’s management team must establish the end-user pricing for a capacity upgrade to the QTX servers Clearwater offered. The pricing structure must meet three criteria (see appendix “PRICING STRUCTURE”). Furthermore, the team has differing opinions regarding the pricing structure for the QTX product line (see appendix “MANAGEMENT PRICING OPINIONS).

Possible Solutions & Analyses

1. Rob’s proposal: use the margin on the 30-seat unit as the basis to the price for the upgrade. While this proposal keeps their margins consistent, it isn’t viable because Clearwater would essentially lose money in the long-run.
2. Brian’s proposal: charge the customer the difference between what the buyer has already paid and the price of the new capacity. This option is fair to the customer and easy for them to understand while still bringing in revenue for Clearwater.
3. Hillary’s proposal: to be as aggressive as possible and charge customers $15,000 or even $20,000. The sky is the limit.

Recommendation

While none of the prices the management team put together accomplishes all three points that the price structure for the upgrades, I believe that Brian’s proposal comes close. The only problem with this price structure is that it’s very likely that there’s money being left on the table that they could have capitalized on. It’s always easier to start high, adjust the price along the way when necessary than it is to start with a lower price and increase it down the road. Since there’s more money to be made with the 20-seat upgrade price of $9,250 I think Clearwater should start out by charging a little more than this and see what their customer’s responses are. What price should they start at? I think a good starting point would be to take the average of the price for the upgrade using Brian’s method and the actual price of a new 20-seat server ($14,000). This would result in the price of a 20-seat upgrade being $11,625 and the 10-seat upgrade would cost $5,625 (see appendix “RECOMMENDATION”). Both of these prices wouldn’t leave any money on the table that could be brought in as revenue and they’re fair to the customer. Upgrading becomes the logical and affordable option.