Problem 1: Modeling
Fitbit, Inc. is a wearable technology company headquartered in San Francisco, California. The company was founded in 2007 by James Park and Eric Friedman, with the goal of inspiring individuals to live healthier and more active lives. Fitbit specializes in fitness trackers that measure data such as the number of steps walked, quality of sleep, and heart rate. They have sold 21 million devices since 2011, and the company is considered one of the leaders in the wearables market.
This case focuses on decisions Fitbit faces in developing and releasing a new product that does much more than activity tracking. However, they have reason to believe that some of their biggest competitors are also developing similar products. By making careful decisions about the product, Fitbit believes they can still dominate the market for this new type of device.
Pricing
One of the main decisions Fitbit faces is determining the price of their device. Based on historical sales of Fitbit devices, they know the price should be no less than $100, and no more than $400. By analyzing historical data, they have developed the following expected demand equation for pre- orders (the expected number of people who will pre-order the device, so as to have it shipped as soon as it is released), which depends on the price of the Fitbit device (Price):
Expected Demand (pre-order) = 208,000 – 318*Price
While this equation is accurate for most prices, they know demand will never be negative.
Pre-Release Production
Producing more devices lowers the cost per device, but also increases the total time it takes for the devices to arrive from the manufacturer. The manufacturer gave Fitbit the information listed in Table 1 for the production cost per device, as well as the estimated time required.
These critically depend on the number of devices produced. For example, if Fitbit wants to have 80,000 devices produced, they will pay $75.00 each for the first 50,000 devices, $55.00 each for the next 25,000 devices, and $40.00 each for the last 5,000 devices. Also, producing the 80,000 devices would take 11 weeks on average. Unfortunately, based on past experience, Fitbit knows that the actual time for production can vary by +- 2 weeks (so to produce 80,000 devices, it could take anywhere from 9 to 13 weeks).
Number of devices Cost (per device) Total time
50,000 or less $75.00 6 weeks
50,001 – 75,000 $55.00 8 weeks
75,001 – 100,000 $40.00 11 weeks
100,001 – 125,000 $28.00 15 weeks
125,001 or more $20.00 20 weeks
Table 1: Production cost and production time estimate
Fitbit wants to release their device as soon as possible, since they expect their competitor to enter the market any day now. Therefore, they have decided to order the devices today, and publicly announce a shipping date of 14 weeks from today. If the products arrive from the manufacturer in 14 weeks or less, they can be shipped to the customers who have pre-ordered the device without any complications. However, if the products take more than 14 weeks to be produced, Fitbit has decided to give each customer who has pre-ordered the device a $25 rebate.
1. (20 points) Build a spreadsheet model in Excel that predicts the profits for the new device, when Fitbit prices it at $250, and the production time ends up being exactly equal to the manufacturer’s estimate.
2. (5 points) Using the model you built in Question 1, what price should Fitbit set for their device to maximize profits? [ Clarification: Here, it is OK to provide an answer that is within $25 of the optimal price. ]
3. (5 points) How does your answer to Question 2 depend on the actual time it takes to produce the device (which may not necessarily correspond to the manufacturer’s estimate)? [ Same clarification as in Question 2 applies. ]
4. (*) (10 points) Fitbit believes they can increase the demand by offering more color choices. Table 2 shows how they expect the demand to vary based on offering more than one color option. For instance, if they offer the device in 3 colors, demand would increase by 18,000 (in addition to the expected demand in the main text).
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