Hbs Profit Logic Case Analysis

CASE STUDY #2: PROFIT LOGIC

Recommendation

In order for ProfitLogic to capture a more prominent role in the growing market of the retail IT sector, ProfitLogic should transform into a licensed software company. Market needs are shifting away from the ASP model to more user-friendly licensed software model. Customers are not willing to commit to high amounts of monthly maintenance fees, while having their own internal software team at the same time. Moreover, the ASP market is not growing as expected and product implementation process is less scalable, slow and costly. Even though data shows that the ASP model will provide higher profit in the short term, with the licensed software product, ProfitLogic will increase its market share and, in the long term, earn higher profits. Therefore, switching to a licensed software model is necessary for ProfitLogic's success in the long term.

Expanding into New Market Areas

As Kirk points out, switching to a licensed software model will increase ProfitLogic's market share by adding other software tools such as planning, buying, allocating and replenishment. By including various software tools to its product offering, ProfitLogic can expand its customer base and serve a bigger market. Moreover, ProfitLogic will be more efficient in configuration and will be able to serve more customers simultaneously. While software developers will work on writing the licensed software product, small group of PhD scientists can focus on developing innovative

solutions to different market segments of the retail sector that will make ProfitLogic more competitive.

Financing the Licensed Software Model

Switching to the licensed software will cost approximately $2.5 million to build the front-end and $2.5 million to standardize the back-end. Moreover, it will also require more software developers in the organizational structure and will increase the monthly burn rate to $1 million. However, since ProfitLogic has to standardize back-end in order to quickly develop and implement the ASP model, switching to the licensed software model will only cost additional $2.5 million. Moreover, ProfitLogic will be able to scale revenues quicker compared to the ASP model, since in the licensed software model, initial configuration fee and licensing fee will be charged upfront. Smithfield is already interested in purchasing a licensed software product from ProfitLogic. Therefore, ProfitLogic should demand the $2.2 million up-front from Smithfield for licensing and configuring. The upfront payment from Smithfield and $9 million cash together will provide ProfitLogic with sufficient