ServiSoft Software Company is entering the home computer software market with a new line of girls educational software games compatible with the Macintosh and PC home computer platforms. The games will be priced at $39.95 and are intended to sell through both computer stores and mass merchants. Because of the unique nature of these products, ServiSoft plans to promote the products with an intensive publicity campaign, as well as through advertising. Initial interest in the story has already been expressed by several major national newspapers, and the prospect looks good for network TV to also pick up the story. ServiSoft's distribution strategy is to develop broad distribution through most retailers that carry computer software. However, they have run into a problem. The quickest and most efficient way to get distribution is through the three leading software wholesalers, Softsel, Soft-Kat and First Software. These distributors have thousands of computer retailer accounts, and, more importantly, mass merchant accounts that their salesforces call on regularly. They screen the products submitted to them by publishers to be sure they meet their standards of quality and marketability. They offer quick turnaround on small orders placed by retailers. They also offer a liberal return policy on merchandise that doesn't sell well. In fact, it is well known that the mass merchants like K-mart and Sears will buy software products only from these major software distributors, and will not buy from individual manufacturers or publishers. The problem is that the software industry has long worked on a margin structure of allowing 55% discount off suggested retail for wholesale distributors. These wholesalers then allow a 40% discount off retail price for the retailers. This means that the manufacturers price typically would be 55% off the suggested retail price, and the wholesale price would be 40% off the retail price. However, ServiSoft has noticed that the wholesalers are becoming more powerful, and now demand that in order to carry a new software product the wholesale distributor must receive a 60% discount, instead of 55%. ServiSoft has balked at this idea, since ServiSoft then will either have to reduce its expected profit margin, or increase the price at retail. To get around the national distributors, ServiSoft is considering selling direct to retailers. This would mean that ServiSoft would contract with a network of independent reps that specialize in software and computer products. Each of these reps sells and services accounts in a specified sales territory and will usually sell the products for a straight 10% commission of wholesale price. The margin allowed for the retailer is 40%. ServiSoft figures it would need to contract with about 30 to 50 reps to cover the U.S., with each rep managing roughly 300 accounts. QUESTIONS: 1. Should ServiSoft cave in to the distributors, or go around them and go direct using independent reps? 2. Go through a margin analysis, and determine how much revenue ServiSoft will realize per unit under both distribution options. 3. If ServiSoft plans to spend $1.5 million on advertising in the first year; $300,000 in manufacturing and engineering costs; and $600,000 in consumer promotions; and the variable cost per unit is $8.00, how many units need to be sold to break-even? What is the break-even number in dollar terms? 4. Your boss has given you the following estimates on costs and sales quantities. Using these data, what is the price at which ServiSoft would maximize its profit? For these calculations assume that you sell direct to retail; the retail markup is 40% (there is no distributor markup); the sales rep commission is already included in Variable Cost/Unit. Retail Expected Variable Fixed Price Unit Sales Cost/Unit Costs $20 450,000 $7.50 $2,000,000 $30 320,000 $7.50 $2,000,000 $40 250,000 $8.50 $2,000,000 $50 100,000 $9.00 $2,000,000