Atlantic Computers : A Bundle

of Pricing Options
Marketing-II
1. Problem Statement
Atlantic Computer is a manufacturer of servers and high-tech products. There are two
segments in server industry: High Performance Server and Basic Server. With increase in
use of internet the market for Basic server is growing. Hence Atlantic has developed a
Basic server, Tronn and a software tool, Performance Enhancing Server Accelerator
(PESA). We have to determine what pricing strategy should be implemented by Atlantic
Computers to price Atlantic Bundle.

2. SWOT Analysis : Atlantic Computer : Launch of basic server (TRONN + PESA

bundle )
Strengths : Weaknesses :

1.Strong player in High performance 1. Limited emphasis on developing

Servers segment ( 20% market share )
2. Brand Image : Providing top notch,
highly reliable products , and reputation
for providing high quality after sales
assistance
3. One Tronn + PESA combination
equivalent to 4 basic servers in terms of
performance
4.First order and second order savings
for the customers
Opportunities:
and selling software tools
2. PESA has detrimental effects when
loaded onto high performance
servers
3. Sales force was not fully adept at
selling the value of PESA software
tool to customers
Threats:

1 .Market for basic servers growing at
a CAGR of 36%
2. Tronn + PESA bundle very high on
performance in its application as web
servers
3.Upper hand in value based pricing
strategy
1. Major player Ontario already has a
50% share in basic server market
2. Ontario had a very flexible and
innovative supply chain strategy
3. Widely held belief that software
tools should be provided for free
4. Unlike Atlantic, Ontario’s had an
online channel for sales

3. 5 C Analysis of Atlantic Computers Company

Company :
 Atlantic computers is a leading developer of high-tech servers
 Largest player in computer industry, selling its high-end performance server –Radia
 Providing top notch, highly reliable products and had developed a reputation of
providing high quality , responsive post sales assistance
 Planning to launch ‘Atlantic bundle’-new Tronn server and the PESA software tool
Customer :
 Company deals with large enterprise customers
 Two market segments in server industry- high performance server & basic server
 High performance server used by firms for supply chain management, resource
planning, simulation etc.
 Basic server used by firms for simple repeatable tasks like ‘Web server’ for
DayTraderJournal.com
 Context :
 Company is going to launch ‘Atlantic bundle’- Tronn server and the PESA software
tool
 PESA-Performance Enhancing Server Accelerator, software tool allowing Tronn to
perform four times faster than its standard speed
 Atlantic computer needs to decide the pricing strategy required to be implemented
 Available pricing strategies are: Status Quo, Competition Based, Cost-Plus, and
Value in Use pricing. Pricing right for the ‘Atlantic Bundle’ which benefits the firm
and to figure out how the customers and competitors are likely to react and respond
for proposed pricing strategy
Competitors :
 Ontario Computers Inc. are the prominent competitor of Atlantic computers
 Its Zink product line, a low-end server, claims 50% revenue market share in the basic
server market
 Ontario’s servers performed at approximately the same level as Atlantic’s Tronn
 Ontario’s majority sales were generated online

4. Computation of number of Tronn Servers anticipated to be sold with PESA software

tool
Year Projected Market Atlantic’s share of Volume of Tronn
Volume in Basic basic server segment servers in market (in
Segment(in units) (A) (As per footnote 5 in units) (A*B)
case) (B)
2001 50000 4% 2000
2002 70000 9% 6,300
2003 92000 14% 12,880
Total 2,12,000 21,180

Assumption: Volume sales computation has been used according to the method
mentioned in footnote no.5 for cost plus approach, but this has been extended to
other alternative methods too.
Alternative methods of setting the price for the Tronn+PESA bundle
1. Give the software tool away for free and charge only for the hardware
2. Charge a price equal to what the customer would pay for four Ontario Zink
servers.
3. Charge a price based on a cost-plus approach to pricing PESA(based on software
tool’s development costs)
4. Charge a price based on value-in-use pricing.

1. Charging only for the hardware

Price per Tronn Server (A) $ 2,000.00

Price of PESA Software(B) $ 0
Total Price of Bundle (A+B)=(C) $ 2,000.00
Price of two Tronn servers (C)*2 $ 4,000
Price of four Zink Servers $ 6,800

2. Charge a price equal to what the customer would pay for four Ontario Zink servers.

Price of 4 Zink Servers (1700*4) (A) $ 6,800.00

Price of 2 Tronn Server loaded with PESA Software (B)=(A) $ 6,800.00
Price of Tronn Server loaded with PESA Software (B)/2 $ 3,400.00

3. Charge a price based on a cost-plus approach to pricing PESA(based on software

tool’s development costs)

Total Sale of Tronn Servers during 3 years 21180

Tronn Servers sold with PESA (50% attach rate) 10590
Software development costs of PESA per unit $189
(2000000/10590) (A)
Cost per Tronn Server (B) 1538
Total Cost of Bundle (A+B) = (C) 1727
Price for Tronn+PESA bundle (C)*1.30 (cost+.3 markup) 2245

4. Charge a price based on value-in-use pricing.

Zink 1 unit Zink 4 TRONN 1 Tronn 2 Savings

units unit units
Hardware price 1700 6800 2000 4000 2800
Software Costs 750 3000 0 0 3000
Electricity 250 1000 250 500 500
Labor cost per 2000 8000 2000 4000 4000
server
(80000/40)
Total 4700 18800 4250 8500 10300
50% of savings 5150
gain(that shall be
passed on to
consumer)
Savings per 2575
TRONN server
Price of TRONN 4575
Server
(2000+savings)

Profitability analysis:
Revenue
Pricing Alternatives Price/Tronn Server No. of units Revenue(A)
Give software tool for free $ 2,000 10590 $ 2,11,80,000
Charging a price equivalent $ 3,400 10590 $ 3,60,06,000
to price of 4ZINK servers
Cost-Plus Pricing $ 2,245 10590 $ 2,37,73,646
Value-in-use Pricing $ 4,575 10590 $ 4,84,49,250
Costs Profit
Pricing Options Cost per R&D Cost Total cost(B) (A-B)
unit
Status - Quo $ 1,538.00 $ $ $ 28,92,580
Pricing 20,00,000.00 1,82,87,420.00
Competition $ 1,538.00 $ 20,00,000.00 $ $ 1,77,18,580
 based Pricing 1,82,87,420.00
Cost-Plus Pricing $ 1,538.00 $ 20,00,000.00 $ $ 54,86,226
1,82,87,420.00
Value-in-use $ 1,538.00 $ 20,00,000.00 $ $ 3,01,61,830
Pricing 1,82,87,420.00

5. Alternatives available for Atlantic Computers

 Continue with the existing strategy of handing out free software according to the
present day industry norms:- The strategy was in accordance with the present day
industry norms. However it would not be useful for the company when it came to
users who did not want the additional features.
 Price the product according to the competition:- As the combination of the TRONN
server with the PESA was as good as 4 ordinary servers of the competitor, it could be
priced around 4 times the price of the competitors product. However it could lead to
a very large price not suitable for people who wanted to purchase the server for
ordinary requirements. It would also become imperative to pool the PESA and
TRONN offerings together since only then the combination could challenge 4
individual servers of the competitor.
 Price the product on a cost plus basis:- The company could think of the development
costs incurred on both the TRONN and the PESA products on the basis of the costs
incurred on developing them and then adding an adequate profit margin.
 Price the product according to the value in method:- The total price could be decided
according to the consolidated savings available on all aspects like equivalent
performance , electricity etc. However it could lead to very high prices that were
unattractive.

6. Critical Evaluation
 Handing out software which required significant development costs freely would
affect the margins of the company. Moreover it would lead to a higher price even for
customers who did not need the enhanced performance. The advantage was that it
went along with the current industry trends and did not disturb the consumption
pattern of the industry.
 The strategy could demonstrate that the server together with the software was as good
as 4 servers of the competitor but it could lead to tremendously high retail prices
which may not go down well with the customers.
 Pricing on a cost plus basis may not allow the company to fully leverage the value it
could derive from a breakthrough product. People could be willing to pay
significantly more if it met their requirements. Charging a uniform cost plus rate
could thus affect the profitability.
However it could lead to affordable prices that would appeal to a large population.
 The Value in method could allow the company to reap the maximum profits.
However it would be difficult to explain all the cost advantages to the customers as
they would have to shell out very high prices this way.

7. Conclusion and Recommendations

 Using a strategy of giving free software does not seem feasible as not only leads to
margin erosion but also downgrades the effective value of their innovation.
Following the industry norms is an easy way out which eventually leads to an
erosion of the actual value that their product offers.
 Charging a price equal to 4 Zink servers also seemed a erroneous methodology
because not only did it put prices way beyond the market prices, it also directly
compares their product to a rival product placing emphasis that they were directly
competing with Zink’s server thus failing to establish their own core brand.
 A cost plus basis or the value-in-use proposition seemed that could be implemented.
 The value-in-use pricing was especially a prospect worth considering because it
showed the users what they actually gained by using the server and therefore
allowed the product to showcase its innovative characters.
 If the value-in-use implementation is to be used it requires the sales team to play an
important role in marketing the product as a potentially faster and money saving
device for the consumer. Therefore it is necessary for the sales team to convince the
customer of the saving they are actually making on using the product.
 As they are not first movers in the industry of basic servers, it signifies a great
difficulty for Atlantic to establish themselves which therefore signifies that rather
than competing on a price level, they must showcase the value of their product for
the customer and thus a value-in-use strategy is the best alternative out of the four.
 With the launch of the Atlantic server, an expected consequence could be Ontario
reducing prices of its server based on the fact that they compete on prices only. A
value-in-use strategy to price their product would serve Atlantic to not worry about
this price as they position their product differently, i.e. they serve the customer on
basis of quality and afford a saving in the long run. This is a key differentiation that
they could achieve by following the value-in-use strategy and therefore hope to
survive in a market where they are not the first movers.
 Companies hosting web servers should be the primary target market for the Atlantic
server as indicated by their tests which indicate 4 times more speed on web server
applications.