ATLANTIC COMPUTER

A BUNBDLE OF PRICING OPTIONS

By Kanishka Poddar (220)

Case Analysis

In this case, Atlantic Computer is a manufacturer of servers and high-tech

products.

Two market segments exist in the server industry: High performance and
Basic Servers. Atlantic Computers has held a 20% share of the High
Performance market with their Radia servers being their premier product.
However, the market for Basic servers is growing and this has caused
Atlantic Computers to develop and introduce a Basic Server called the
Tronn and a software tool called the Performance Enhancing Server
Accelerator (PESA).

The Tronn was developed mainly for the emerging US market opportunity
for basic servers. The PESA would allow the Tronn to perform up to four
times faster than its standard speed and make frequently requested
information more accessible. Thus, bundling the Tronn and PESA made
more sense.

Atlantic is not concerned that the Tronn will be considered a substitute

for its High Performance servers.

Problem Area

What pricing strategy should Atlantic

Computers implement to price the
Atlantic Bundle?

Pricing Strategy

There are four main types of pricing

strategies which Atlantic Computers can
choose.

First, Atlantic Computers could stay with the status

quo and offer software tools for free.
Second, it could choose competitive based pricing.
Third it could choose from Cost-plus pricing.
Finally, it could choose value-in use pricing.

Status Quo Pricing

This option consider only the cost of

server and treats PESA software as free
product along with servers:
Price of 1 Tronn Server:

$2000

2 Tronn Servers + PESA Software (Free)

($2000 x 2)
Price of Atlantic Bundle
=

$4000

$4000

Competition Based Pricing

Pricing the Tronn servers based on price of

competitor server (Zink by Ontario) and
PESA for free.
Since 2 Tronn Server with PESA software is
equivalent to 4 Zink servers:
Price of 1 Zink Server
2 Tronn Server + PESA Software
(4 x $1700)
Price of Atlantic Bundle
=

$1700
$6800
$6800

Cost Plus Pricing

Market
volume (in
units)
Market Volume
of Basic Server
Atlantic Share (
in %)
Estimated Total
Sale of Tronn
Server
Estimated Total
Sale of PESA
software (50% of
Tronn Server
Sales)

2001

2002

2003

50000

70000

92000

14

2000

6300

12880

21180

1000

3150

6440

10590

Cost of Tronn Software

PESA Software Development Cost

Total

$1538
$2,000,000

Cost Plus Pricing

Price per server:

Cost

30% Markup ($)

Total ($)

PESA Cost per server

188.9

56.658

245.52

Cost per Tronn server

1538

461.4

1999.4

Pesa Cost per Server

=
=
=

Total Cost involved/ Total Estimated Sales

2000000/10590
$188.9

After the Markup 30%, as calculated in the above table:

Cost of Atlantic Bundle

$2245

Value-in use Pricing

Considering 4 Zink server is equivalent to

2 Tronn server + 2 PESA software
Cost Savings

Amount
($)

Saving in Electricity

500

Software Licenses

1500

Labour

4000

Cost of Server

2800

Total

8800

As per value pricing model of 50-50% Price of PESA

4400

2 Tronn + 2 PESA

8400

Cost of Atlantic Bundle

4200

Comparison: Projected Revenue and

Profit for 3 Years
Particulars
Estimated Number
of Units over 3
years
Price Per Atlantic
Bundle ($)
Total Revenue from
Sales ($)
Variable Cost per
unit ($)
Total Variable Cost
($)
Fixed Cost for
development of
PESA ($)
Total Cost (in $)
Profit (in $)

Status Quo

Competition
Based

Cost Plus
Approach

Value in use

21180

21180

21180

21180

2000

3400

2245

4200

42360000

72012000

47549100

88956000

1538

1538

1538

1538

32574840

32574840

32574840

32574840

2000000

2000000

2000000

2000000

34574840

34574840

34574840

34574840

7785160

37437160

12974260

54381160

Conclusion
On detailed comparative study of 4 different pricing approch for
Tronn Servers & PESA Softwares, it is eveident from the above
chart that Competition Based pricing is the most suitable option.

This approach takes into consideration competitors prices and provides

superior services at same rate.
The market share is already owned by competition to an extent of 50%,
hence price plays a vital role. It needs to highly competitive and at par with
the pricing of competitive products.
Low price does not always means that product will bhe accepted by the
market. If the prices are very low, the market even presumes that the
quality of product if inferior.
If the pricing are very low, competitors can also reduce there prices to that
extent as there product already command certain share in the market.
If prices are too high as given in Value in Use Pricing, then consumer may
not accept the product and would prefer to buy two products of
competition in place of one Tronn Servers.