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Atlantic Computers

Pricing for Atlantic Bundle


Student # S01180176
Mailbox # 2052

On my honor, I have neither given nor received any unauthorized aid on this case assignment.
1. What price should Jowers charge DayTraderJournal.com for the Atlantic Bundle (i.e.,Tronn
servers+PESA software tool)?
Jowers should charge $3,500 per unit of Atlantic Bundle ($2000 for server + $1500 for PESA).
Below are round1 and round 2 benefits:
o Round-1 : At $3500 per unit of Atlantic Bundle, customer is paying $200 more than
buying 4 Zink server ($1700 each). But this additional $200 will help customer to save
significant amount on operational cost.
o Round-2 : Per details in the exhibit-1, each additional dollar spent on acquiring Atlantic
Bundle will save $29 a year on operational activities. This is significant long run saving.
So overall, DayTraderJournal.com will save $5800 from this transaction. Exhibit-2 shows the
calculation of value PESA will create for DayTraderJournal.com by saving cost for operational
activities.
Also, by charging $3500 per unit of Atlantic Bundle, Atlantic Computer will be able to capture
part of the value that will be created due to PESA tool. The calculation total value created and
share of it used to determine price of PESA are explained in exhibit-2.

2. Think broadly about the top-line revenue implications from each of the four alternative pricing
strategies. Approximately how much money over the next three years will be left on the
table if the firm were to give away the software tool away for free (i.e., status quo pricing)
versus utilizing one of the other pricing approaches?
As shown in the exhibit-3, with status quo pricing, Atlantic Computer would be foregoing big
chunk of money by giving PESA away for free. Moreover, thinking through the big picture
view of overall industry, Atlantic Bundle is the product that could change (reduce) the demand
(in terms of number of servers in the market. So lower price can give Atlantic Computer short
term benefits of capturing higher market share but decrease in demand will impact both
revenue and profitability at long run and hence setting up right price for Atlantic Bundle is very
important.

3. How is Matzer likely to react to your recommendations?


Matzer is not going to like $3500/unit of Atlantic Bundle. As details provided in the case,
Matzer has done thorough analysis of potential of market for basic servers. The demand for
basis servers is going to increase rapidly in coming years and it is key for Atlantic Computer to
start penetrating in this market in order to increase overall revenue. With this view, he
decided to develop a new product line in the basic server segment. Now, Ontario Computer is
dominating this market and selling servers that best serves customers' need at lower price is
the main reason behind their success.
So Matzer would be more inclined towards penetrating market with aggressive pricing and this
why he will not agree with pricing Atlantic Bundle for $3500/unit.

4. How is Cadenas sales force likely to react to your recommendation?


As Cadena's sales force salary structure was 70% salary and 30% commission (assuming that
commission is based on the sales and not on number of units), they would be fine to sell
Atlantic Bundle for $3500/unit. Selling bundle at recommended price will earn them almost
double commission compared to selling the bundle at $2000/unit.

5. What can Jowers recommend to get Cadenas hardware-oriented sales force to understand
and sell the value of the PESA software effectively?
The industry norm is to give away software tool and price for the server only. But here, it is the
software tool that is going to create most of the value both for customers and for Atlantic
Computers. Hence it is very important to communicate to customers how and how much PESA
can help them to save. The only effective way to communicate this is charging appropriate
price for PESA.
So to get Cadena's sales force to understand the value of PESA and sell it at appropriate price,
Jowers should recommend using the calculation per shown in exhibit-1 and exhibit-2. Each
sales person should be knowing the calculations to find overall value that PESA can create and
how we are determining the price of the software by sharing a portion of overall value.

6. How are customers in the firms target market likely to react to your recommended pricing
strategy? What response can be provided to overcome any objections?
At first sight customers would not like recommended pricing for Atlantic Bundle as
o They would find the per server cost for Atlantic Bundle much higher (double) than that
of Zink.
o Being unaware of the capabilities of PESA, they would not prefer to pay for the tool.
The model that we used to determine price for DayTraderJournal.com (exhibit-2) will be a
useful tool to showcase the overall value created by Atlantic Bundle in terms of savings on
operational activities throughout the lifetime of the server. Customers will not see much
benefit with acquisition cost saving (round-1) but PESA will give significant benefits by saving
on possession cost (round-2). Showcasing customers that server with PESA loaded onto it will
cut down the number of servers required to server the purpose by half and this will be the
source of cost saving will help customers to realize the benefits of purchasing Atlantic Bundle
and using it for long term.

7. How is Ontario Zinks senior management team likely to react to the Atlantic bundle?
Ontario's senior management is not expected to reduce the price of Zink server as to give
more of round-1 benefits (acquisition cost savings) because reducing price will impact their
profitability for short term without gaining much of benefits (in terms of greater market share)
at long run. At current price of $1700 per Zink server, Ontario is earning at 40% of profit
margin. Suppose that to match with Atlantic Computer's profit margin for Tron server (without
PESA) of 30%, Ontario reduces the price of Zink server by $100 per server; it will not be able to
create significant value in terms of lower acquisition cost as compared to that with Atlantic
Bundle. Even after reducing the price of Zink server, due to the fact that number of servers
required for meeting processing needs is not going to change, operational costs will remain
higher compared to that with Atlantic Bundle. As shown in exhibit-4, using the data of
DayTraderJournal.com, with Atlantic Bundle round-2 benefits (savings on possession cost) will
still be significant ($5400 per year) comparing the operational cost of number of required Zink
servers.
So per game theory, the most likely action that Ontario Zink's senior management is expected
to take is finding ways to enhance performance of the server to bridge the gap between
number of servers required to achieve required level of performance. Also, at short run they
are expected to react with aggressive marketing campaign on the basis of lower price and
related acquisition benefits.
Exhibits
Exhibit-1: Operational benefits due to PESA

Total Operational Savings


$6,000.00
(one year)
Value Sharing 50%
PESA - Price/unit $1,500.00
Tronn - Price/server $2,000.00
Atlantic Bundle -
$3,500.00
Price/unit
Excess Price Compared to
$200.00
Zink Servers
Savings/excess$ $29.00
Savings/$ of PESA $3.87

Exhibit2: Recommended pricing of Atlantic Bundle

Acquisition Cost Possession Cost


# of
Servers Per
Total Electricity Licenses Admin Total
Server
Tronn 2 $3,500.00 $7,000.00 $500.00 $1,500.00 $4,000.00 $6,000.00
Zink 4 $1,700.00 $6,800.00 $1,000.00 $3,000.00 $8,000.00 $12,000.00
Savings -$200.00 $6,000.00
Total
$5,800.00
Savings

Exhibit-3: Revenue comparison of status-quo pricing with other pricing options

Expected Revenue Atlantic Bundle - Status Quo Pricing


2001 2002 2003 Total
Expected
1000 3150 6440 10590
Sales
Price/unit $2,000.00 $2,000.00
Status quo $2,000,000.00 $6,300,000.00 $12,880,000.00 $21,180,000.00
Forgone Revenue Atlantic Bundle
Value-in $1,500,000.00 $4,725,000.00 $9,660,000.00 $15,885,000.00
Cost Plus $245,514.64 $773,371.10 $1,581,114.26 $2,600,000.00
Matching
$1,400,000.00 $4,410,000.00 $9,016,000.00 $14,826,000.00
Zink Price
Exhibit-4: Acquisition and possession cost benefits for DayTraderJournal.com with reduced price of
Zink server

Acquisition Cost Possession Cost


# of
Servers Per Electricit
Total Licenses Admin Total
Server y
$3,500.0 $7,000.0 $1,500.0 $4,000.0
Tronn 2 $500.00 $6,000.00
0 0 0 0
$1,600.0 $6,400.0 $3,000.0 $8,000.0 $12,000.0
Zink 4 $1,000.00
0 0 0 0 0
Savings -$600.00 $6,000.00
Total
$5,400.00
Savings