Existing virus-protection programs rely on virus databases that need to be updated constantly as new viruses emerge. A typical virus-protection site license costs $4,500 per year for sites of less than 500 machines. Regular updating of the databases costs around $80 in productivity loss per installed computer per year. Even with regular updating of the databases, there is a possibility that unaccounted-for viruses will infect a companys computer systems. Virus-protection experts estimate that, with current virus-protection software, the probability that a company will experience exactly one complete system breakdown because of a virus within one year is 8%. The probability that it will experience exactly two such breakdowns within a year is 3%. The probability of more than two breakdowns is virtually zero.

A complete system breakdown, which typically lasts one day, would cost (in profits from lost sales) $40,000 to a retail company with 250 machines and $85,000 to a typical financial services company with the same number of machines.

Cortex Software Inc. is about to introduce new virus-protection software called DNX. DNX is based on a mutating-virus simulator (MRS), which, according to Cortex, will revolutionize the virus-protection landscape. The MRS essentially eliminates the need to update virus databases. The MRS is extremely powerful and, as a result, increases the probability of detecting infected files. Researchers at Cortex estimate that companies equipped with DNX have only a 2% probability of experiencing a virus-caused complete system breakdown within a year and a 0% probability of experiencing more than one such breakdown.

While the price of a DNX site license remains to be set, it is estimated that clients who adopt the software would incur startup costs (excluding the site license) of $50 per machine in installation, configuration, training, and so on.

Using a one-year horizon and assuming no other costs of virus infection or software, calculate the economic value of the DNX:

a) For a retail company with 250 machines running under existing virus-protection software.

b) For a typical financial services company with 250 machines running under existing

virus-protection software.

How should Cortex price its software? Explain your pricing strategy.