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CASE SUMMARY

Atlantic Computers
A Bundle of Pricing Options
4/4/2011

Atlantic Computers is a leading developer of high-tech servers !t has recentl" decided to e#pand its product line do$n$ards in order to ta%e advantage of an emerging mar%et for &asic servers Before it can launch the 'Atlantic Bundle() Atlantic Computers must decide $hich pricing strateg" to implement Of the four options* Status +uo) Competition Based) Cost-Plus) and ,alue in Use pricing) ! &elieve the &est option is ,alue-in-Use pricing

uested information more accessi&le.uirements for a &asic server purchase are to minimi6e initial purchase costs' minimi6e possession costs and allow their we&site to process many information re.uo and offer software tools for free. Ana y!i! There are four main types of pricing strategies from which Atlantic Computers can choose. 3ayTrader4ournal./ Primary "ue!tion to #e a$$re!!e$: 0hat pricing strategy should Atlantic Computers implement to price the Atlantic Bundle1 Mo$e Cu!tomer: 2n order to decide which pricing strategy to use' it is &est to identify and use the &asic server needs of a model customer. However' the market for Basic servers is growing and this has caused Atlantic Computers to develop and introduce a Basic erver called the Tronn and a software tool called the ($erformance )nhancing erver Accelerator* +$) A. 2d. Thus' &undling the Tronn and $) A made more sense.uests. .! 3ayTrader. At ..com is seeking four &asic servers for their new we&site where day traders will &e a&le to review articles and relevant training information. Two market segments exist in the server industry: High performance and Basic ervers. / 2d. .com is seeking four &asic servers and minimi6ing initial purchase costs and su&se.. The $) A would allow the Tronn to perform up to four times faster than its standard speed and make fre.uivalent of four 9ntario :ink servers. Third it could choose from Cost-plus pricing.7 Because 8at6er' the head of the server division' is conservative in his estimate of the power of the (Atlantic Bundle* we will assume that two (Atlantic Bundles* is the e. Atlantic Computers has held a !"# share of the High $erformance market with their %adia servers &eing their premier product. <irst' Atlantic Computers could stay with the status .ATLANTIC COMPUTER: A BUNDLE OF PRICING OPTIONS Summary of the Situation Ana y!i! Atlantic Computer is a manufacturer of servers and high-tech products. 1 =eera> Bharadwa>' 4ohn ?ordon' (Atlantic Computers: A Bundle of $ricing 9ptions*' .market opportunity for &asic servers.uent possession costs are two very closely ranked considerations. econd' it could choose competitive &ased pricing. At /".5 Their top re. =eera> Bharadwa>' 4ohn B. The Tronn was developed mainly for the emerging . 2n this case' 3ayTrader4ournal. <inally' it could choose value-in use pricing. ?ordon@ Atlantic Computer: A Bundle of $ricing 9ptions' !""A' /-B. Atlantic is not concerned that the Tronn will &e considered a su&stitute for its High $erformance servers. )xhi&it 7 0 2d.uently re.com will &e used as the model customer. .

G Therefore' under the Competition-Based $ricing' the price of two (Atlantic Bundles* would &e E57"" x ! or EDB"". tatus Cuo $ricing: The industry norm for pricing a server and software &undle is to merely include any software tools with the hardware.uivalent of four :ink servers' the $) A software does not work on all 2 3 =eera> Bharadwa>' 4ohn ?ordon' (Atlantic Computers: A Bundle of $ricing 9ptions*' 2d.html 5 =eera> Bharadwa>' 4ohn ?ordon' (Atlantic Computers: A Bundle of $ricing 9ptions*' )xhi&it 5' G -6 )xhi&it /' supra pg. This would make the price of two (Atlantic Bundles* E7'""". A / .uivalent to four of 9ntarioFs :ink servers.&usinessdictionary.D This would re. Atlantic Computers has always practiced this pricing strategy. at 7 4 http:HHwww. Pri%in& Strate&ie!: 1. =ext' Atlantic Computers will have to consider how customers are likely to react to the Atlantic Bundle. Consumers would see that they are only getting two Tronn servers at a price that they could get four :ink servers. Competition-Based $ricing: Competition-Based pricing uses the prices of competitors as a &enchmark for pricing products rather than considering costs. 2t would &e hard to >ustify the additional E/'!"" in price. 2. 0hile selling at this price would generate more profits for Atlantic Computers/"' it is not certain that consumers would purchase the (Atlantic Bundle* at this price.A This would re.2n addition to determining which pricing strategy to use' Atlantic Computers must also determine which &usinesses are most likely to &enefit from the Atlantic Bundle. 8aking a direct comparison &ased on hardware and price' customers would see that they could get 7 :ink servers for ED'B"" whereas it would cost EB'""" for four (Atlantic Bundles*.uire Atlantic Computers to essentially lose the E!'"""'""" cost of research and development of $) A. Customers would see that they are getting half of the hardware. Additionally' the Tronn erver would appear to customers as very compara&le to the :ink servers and it would make it difficult for Atlantic Computers to compete with and gain market shares in the &asic servers segment. <inally' Atlantic Computers will also have to consider how competitors will respond to the recommended pricing strategy. <urthermore' &ecause Atlantic Computers would &e giving $) A away' it would appear that there are no su&stantial differences &etween the (Atlantic Bundle* and the :ink servers.B The price of 9ntarioFs :ink servers is E/A"" and conservatively speaking' two (Atlantic Bundles* is e.comHdefinitionHcompetition-&ased-pricing. 0hile the addition of the $) A software tool would make the Tronn servers the e.uire Atlantic Computers to offer the $) A software tool for free with the Tronn erver.

Harvard Business Review' 8ar!""D' Jol.@ =arus' 4ames A.7D a&ove the :ink server. $rice of Tronn without $) A installed +Cost I 5"# markup. Customer Jalue $ropositions in Business 8arkets@ Anderson' 4ames C. Customer value can &e defined as the worth' in monetary terms' of the technical' service' social' and economic &enefits a customer receives in exchange for the price it pays for a product.// <urthermore' customers would need further >ustification to have only half of the hardware and run the risk of one or &oth servers &eing out of commission for any given amount of time.@ van %ossum' 0outer.@ van %ossum' 0outer.@ =arus' 4ames A./D 2n this case' the --.G". B7 2ssue 5' pG"-GG -/ =eera> Bharadwa>' 4ohn B.software applications. ?ordon@ Atlantic Computer: A Bundle of $ricing 9ptions' !""A' D -0 2d. 3./5 A predetermined percentage is then added to these costs to provide a profit margin.G" E/BG E!""" E!'!7D E7'7G! 4. Again' 2t would &e difficult for Atlantic to persuade customers to purchase the servers &ased on the Cost-$lus pricing &ecause customers would still only see that they are getting two servers for E7'7G! whereas they could get two :ink servers for E5'7"" and that is E/'"G! more expensive than 9ntarioFs :ink servers. Therefore' it would cost E7'7G! as compared to ED'B"" for the :ink servers.uivalent of four :ink servers. Cost-$lus $ricing Total =um&er of Tronn servers sold in 5 years Total installations of $) A assuming . Because we are looking at this conservatively' we will assume that two Tronn servers are the e. -1 :ink servers are priced at E/'A"" each. ?ordon@ Atlantic Computer: A Bundle of $ricing 9ptions' !""A' D' footnote ./! Customers would likely not consider purchasing the (Atlantic Bundle* &ased on Competition-Based pricing &ecause they would not see it as a fair price and worth the risk. $rice of ! Tronn servers loaded with $) A !/'/B" /"'. Adding 5"# to the cost of $) A would make the price E/BG. Jalue-in-use $ricing: -sing the Jalue-in-use pricing method' Atlantic Computers would determine the value that each customer would reali6e from the purchase of the product./. Harvard Business Review' 8ar!""D' Jol. =eera> Bharadwa>' 4ohn B./7 The cost of a Tronn server is E/'.5B and &ased on a E!'""" price' this additional markup is approximately 5"#. 0ithout further >ustification' customers are not likely to accept this additional cost. $rice of Tronn with $) A installed +Cost I 5"# markup. -2 Customer Jalue $ropositions in Business 8arkets@ Anderson' 4ames C. As the chart &elow details' under the cost-plus method' the price of a Tronn loaded with $) A would &e E!'!7D which is E."# attach rate Cost of $) A per installation +E!'"""'"""H/". B7 2ssue 5' pG"-GG 0 . Cost-$lus $ricing: Cost-plus pricing is determined &y adding the direct' indirect and fixed costs associated with a product and converting it into a per-unit cost for the product.

As shown in )xhi&it /' the Competition Based pricing method will generate more profit per unit than any other method@ however' it will not allow Atlantic Computers to fully demonstrate' in monetary terms' the true value of the (Atlantic Bundle.* This would help demonstrate in monetary terms the customerFs true value of &uying the (Atlantic Bundle."-. Because the (Atlantic Bundle* is a &asic server and software tool that allows it to operate at four times the speed' it is e."" per server./G After a . ?ordon@ Atlantic Computer: A Bundle of $ricing 9ptions' !""A' B 1 .uivalent to four :ink servers.uates to a savings of E7'B"" to a customer. Ka&or is not included &ecause the cost is the same for &oth servers' regardless of .uantity. Which market should be targeted? The target market for the (Atlantic Bundle* would &e those companies that do a lot of we& hosting. Additionally' Atlantic Computers will share in the savings of customers' further adding to their profits.* 'a ue(in(u!e Pri%in& $rice of erver )lectricity +Annual Cost./A 2t would then calculate the difference &etween the two figures and assume a .!" Additionally' those companies who do a lot of file sharing would also -3 -4 =eera> Bharadwa>' 4ohn B."-. ?ordon@ Atlantic Computer: A Bundle of $ricing 9ptions' !""A' D -5 This assumes a E!. 1." annual cost for )lectricity per server and annual license fee of E/'."" E5'""" ED'""" E/"'B"" E7'B"" ED'7"" 'a ue(in(u!e )ri%in& i! the #e!t metho$: 9f the four methods availa&le for pricing the (Atlantic Bundle*' the Jalue-Based pricing method is the &est to choose. ."" E/'""" E/'. Conservatively looking at the num&ers' this e./B As the chart &elow illustrates' when the total costs are added' a customer would potentially reali6e a E7'B"" savings when using two Atlantic Bundles as compared to four :ink servers.6 =eera> Bharadwa>' 4ohn B." sharing." share of savings.* The value-in-use pricing method allows Atlantic Computers to demonstrate to customers the true value of their product. ?ordon@ Atlantic Computer: A Bundle of $ricing 9ptions' !""A' )xhi&it 5' G =eera> Bharadwa>' 4ohn B. Tronn x ! :ink x 7 E7'""" ED'B"" E."-. oftware Kicense Total $rice avings +3ifference &etween :ink and Tronn. Total <inal Customer $rice + erver $rice I .customer value would &e the annual cost of electricity and software licensing for each server. 2t is when the Tronn erver is acting as a we&-server and coupled with $) A that the (Atlantic Bundle* is capa&le of reali6ing its true potential of &eing 7 times as fast as the &asic server." share' the total final price would &e ED'7"". -nder this method' it is easy to show customers that they will &e saving E!'7"" when they &uy two (Atlantic Bundles.

?ordon@ Atlantic Computer: A Bundle of $ricing 9ptions' !""A' . Kong %un After the first year' it is pro>ected that the (Atlantic Bundle* will only take approximately 7# of the market share of the &asic share market..!5 They know that they will sell more volume if they are a&le to sell at a lower price. How will Ontario’s top management likely respond? a. 2 . =eera> Bharadwa>' 4ohn B. At this time' Atlantic Computers will have recouped much of the research and development costs associated with $) A and can &egin to include the software as part of the (Atlantic Bundle* at no charge. 9f course' 9ntario will only &e a&le to lower prices for a short period of time &efore such actions &egin to drastically decrease their profits. B .. 2t would take until at least the second year and likely the third year &efore 9ntario would &egin to take action. This is especially true &ecause the salespeople derive 5"# of their pay off of commission. 9ther pro&lems associated with using Jalue-in-use pricing. ?ordon@ Atlantic Computer: A Bundle of $ricing 9ptions' !""A' )xhi&it ! )xhi&it !.uadruples the num&er of &asic Tronn servers.!! 2t is unlikely that 9ntario would &e concerned at this time and would not take any steps to counter-act.* Atlantic Computers will have to demonstrate to customers that the $) A software tool essentially dou&les and possi&le . 9ntario will likely &egin to copy the $) A software and &egin to include it in their :ink server packages. After years of providing software tools for free with servers' it will take some persuading to get veteran salespeople on &oard with the value-in-use pricing method. They will need to emphasi6e that not only are they saving on the num&er of servers they will need to purchase' &ut they will also save on other costs. upra pg. 4. 3. Training the salespeople to show customers exactly the value they will &e getting will help the salespeople understand that they will essentially &e a&le to sell more servers at a higher cost' there&y making more money off of commission.uestion Atlantic ComputersF reasoning for deviating from the tradition of providing performance enhancingHmonitoring tools for free. 2./ =eera> Bharadwa>' 4ohn B.uivalent to ! &asic servers. At this moment' 9ntarioFs reaction would &e to lower prices in order to stop market loss. How are customers likely to respond? At first' customers are likely to .&enefit from the (Atlantic Bundle* as it would still en>oy an increase in performance e. This may &e one of the more difficult tasks associated with pricing the (Atlantic Bundle. Atlantic Computers will also need to emphasi6e that it will continue to provide excellent service after purchase and provide customers with peace of mind.!/ . The salespeople will need to also demonstrate points of difference . hort run vs.

E*hi#it + Pri%in& Metho$ tatus Cuo Competition-Based $ricing Cost-$lus Jalue-in--se Re. This will allow Atlantic Computers to maximi6e their profits &y demonstrating the value of the (Atlantic Bundle* to the customer.00 0 40 . Con% u!ion: Atlantic Computers has decided to enter into the emerging -.'D""'.'/7" E/B'!BA'7!" E. Harvard Business Review' 8ar!""D' Jol.'7GA'A!" E.@ =arus' 4ames A. 2t has developed the (Atlantic Bundle* which consists of a Tronn erver and the $) A software which ena&les the Tronn erver to perform at the rate of four of their competitorFs &asic servers.!7 <inally' the salespeople will need to stress the fact that customers will continue to get excellent service after the initial purchase.B" E!A5 E5D'""D'""" E/B'!BA'7!" E/A'A/B'. B7 2ssue 5' pG"-GG 3 .00 0 60 .00 0 0 2 00 1 20 02 20 03 To tal Ma rket P rojectedS h ares . 9f the four availa&le pricing options' status .0 00 80 . By showing savings of E5'!"" compared to the :ink server' Atlantic will &e a&le >ustify the added costs.@ van %ossum' 0outer. market for &asic servers. . 10 0./G E55'BBB'""" E/B'!BA'7!" E/.uo' competition &ased' cost-plus and value-in-use pricing' it is recommended that Atlantic Computers implement the value-inuse pricing method.00 0 20 .0 $oints of difference are elements that make Atlantic ComputersF offering superior to that of 9ntarioFs.B" E/'DA5 E!5'AB.&etween the (Atlantic Bundle* and the next &est alternative. Customer Jalue $ropositions in Business 8arkets@ Anderson' 4ames C.enue Co!t! Tota Profit! Profit-Unit E!/'/B"'""" E/B'!BA'7!" E!'BG!'.B" E/'7A5 E*hi#it .