CASE STUDY | Atlantic Computer: A Bundle of Pricing Options

Joyce Ann Clarize Galang

Pricing Atlantic Bundle

The case presents an issue on the pricing strategy of Atlantic Computer’s new server product, Tronn that

comes with PESA, a software tool that enables the server to perform up to four times faster (called “Atlantic

Bundle” together). Jowers, the Atlantic’s product manage faces 4 potential routes to take in order to decide

the pricing strategy: first, he could stick with the status quo while charging only the hardware and give

PESA for free; next, he could price it the same way the main competitor Ontario Zink server is priced; also,

he could charge based on a cost-plus approach and lastly, he could use the value-in-use pricing strategy.

Based on the analysis of different pricing strategies, I would recommend Jowers to go with the value-in-use

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pricing strategy as it shows the most reasonable and profitable outcome. Given the high cost savings, it

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would be reasonable to price the product at the higher end as the alternative is costlier, which is buying and

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maintaining 4 servers. This, however, is an undeniably risky pricing strategy for a new product but if
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marketed well, it can yield huge profits for the company.
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1. What price should Jowers charge DayTraderJournal.com for the bundle (Tronn server plus
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PESA software tool)?

(a) Status quo pricing (Pricing based on Exhibit 3: Salient Pricing Information)
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Sales Price per bundle: $2000 (no charges to software tool-PESA)

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Cost per server: $1,538

PESA development cost = $2,000,000
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$2,000,000 on development of PESA / 10590 units = $188.86 cost per PESA

Total Cost = $ 1726.86

Profit per bundle sold: $ 273.14

(b) Competition based pricing

Sales Price: $1700 (based on Zink server’s price)

Total Cost = $ 1726.86 (same)

Profit per bundle: -26.86 (at a loss)

(c) Cost plus pricing

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 CASE STUDY | Atlantic Computer: A Bundle of Pricing Options
Joyce Ann Clarize Galang
Sale Price: $2244 per unit (Calculated below)

The case states that Atlantic’s resulting share of the basic server segment (in units) will be 4%

in 2001, 9% in 2002, and 14% in 2003 with the assumption of 50% attach rate on shipments.

Based on Exhibit 1: Projected volume

2001 (4%): 50000*.04 = 2000 units

2002 (9%): 70000*.09 = 6300 units

2003 (14%): 92000*.14= 12880 units

Total units = 21180 units

Only 50% units with PESA: 21180*.5 = 10590 units

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Costs

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$2,000,000 on development of PESA / 10590 units = $188.86 cost per PESA

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Cost of server = $1538
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Atlantic Bundle Total cost = $1538 (server) + $188.86(PESA) = $1726

Add Mark-up 30% of $1726 = $2244 per unit

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d) Value in use pricing

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Sale Price: $ 4500 (Calculated below)

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Based on Exhibit 3.
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Costs 1 Server 4 Servers Cost Savings

Labor $2,000 $8,000 $6,000
server admin’s salary 80k / #
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of servers 40
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Application Software $750 $3,000   $2,250

Licenses $750/server
Electricity $250 $1,000 $750
Total Cost Savings per year = $ 9000

Only 50% units with PESA: $ 9000 *.05 = $ 4500

Total Cost = $ 1726.86

Profit per bundle sold: $ 2773.14

2. What would be Matzer's likely reaction to your recommendation?

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 CASE STUDY | Atlantic Computer: A Bundle of Pricing Options
Joyce Ann Clarize Galang
Matzer is a veteran in the computer industry in which the norm of pricing is based on the status quo in order

to be competitive. Given that he is on the side of conservative pricing and the fact the he suggested not

charging for the software tool at all but just the server Tronn, he will definitely perceive the recommended

price to be too risky. Ontario has been dominating the market of basic servers with Zink so Matzer would be

more inclined to penetrating the market with aggressive pricing or the conservative status quo pricing. He

will react with great opposition to the recommendation which will require a great deal of justification in

order to convince him of the pricing strategy.

3. What would the likey reaction of Cadena's sales force to your recommendation? What can be done

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to help the sales force implement your pricing strategy?

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Cadena’s sales force basically earns based on how much they sell in terms of price and quantity. The case

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reports that the compensation structure is 70% salary and 30% commission on the sale. With this, it is safe to
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assume the sales force would be in favor of selling the bundle at the recommended price rather than the

lower, more conservative status quo price. However, in order to make these sales, the price needs to be
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justifiable in order for them to be able to market it effectively to the clients or customers. In other words,
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there needs to be a middle ground in terms of benefiting from a higher price through commission and
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making the price reasonable enough to actually sell the products. In addition to this, it has been a norm to
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simply give away software tools and just charge for the server. This present the need for the sales force to

emphasize on the fact that the software tool in the bundle is the product that would make the most value for
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the customers. Therefore, it is very critical to emphasize on the long term benefits of PESA and how it can
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help them save as consumers.

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 CASE STUDY | Atlantic Computer: A Bundle of Pricing Options
Joyce Ann Clarize Galang
4. How are customers in the target market likely to react to your pricing strategy? What responses

can be prepared to overcome objections?

At first glance, it may seem unattractive to the customers since it is almost double the price of the

competitor’s, Zink of Ontario. Some customers, especially those who are just looking into the most basic

function of a server or buying it for short term use, would probably still prefer Zink due to the low price.

Regardless, marketing Tronn for long term purposes would give Atlantic Computer a greater edge. Through

time, files are rapidly becoming bigger and bigger and the requirement for a server to be efficient is calling

for more powerful and faster servers. With PESA as a software tool, the Tronn could be upgraded up to the

power of 4 servers. In the long term, with Tron and PESA, buying 4 Zink servers would be unnecessarily

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costly for the consumers. It is important to emphasize to the customers that Tronn’s upgradability positions it

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on a different level as compared to Zink in the market. The company’s history of customer service can also

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be credited as another value that comes with the product. It is not just about selling the product but also
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keeping the customer satisfied. Tronn is most likely to attract bigger enterprise clients that would be capable

in making big investments in one go and prefers long term stability.

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5. How is Ontario Zink's senior management likely to react to the Atlantic bundle
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Initially, Ontario Zink’s senior management would probably not react as the competing product, Tronn has a
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completely different price point. With this and their existing dominance in the market, it is not likely for

Ontario to see Atlantic Computer’s new product as a threat to theirs. They would continue to compete with
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their competitive pricing. However, it is not impossible for Atlantic to infiltrate Ontarios’s market power and
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if it comes to that, the company will most likely take action. Tronn’s main edge over Zink is its upgradability

and great capabilities when bundled with the software tool PESA while Zink is only competitive in terms of

its lower cost and lower price. In order to remain competitive, Ontario will probably attempt to develop a

similar add on or software tool that will allow Zink to compete with Tronn’s capabilities and versatility.

The analysis of the recommendation

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 CASE STUDY | Atlantic Computer: A Bundle of Pricing Options
Joyce Ann Clarize Galang
On the consumer’s perspective, it would not be surprising to see a well establish company in the

technological industry to produce a high priced product. Also, reactions would depend on where the

expectation is coming from. If consumers expect it to be on the same line as Ontario Zink since it is on the

Basic line of servers, then the price would seem to be too high. For this reason, it is very important to

emphasize on Tronn’s upgradability and versatility in terms of performance with the use of the software tool

PESA to justify its costs and price.

The costs of producing the product would inevitably be higher than the competitor’s since it holds a new

feature that allows it to perform up to 4 times faster than its standard speed. The cost savings from labor,

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electricity and application software licenses, however, makes up greatly for these costs of production and

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operation. Since Atlantic Computer is a well established firm that produces high performance servers, they

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are highly capable, both skillfully and financially, taking the risk of introducing this new innovative product.
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Although the company will be introducing Tronn to be a basic server, it would seem too unique to even
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compare it to another basic server like Zink and the two products compete on different things. Zink
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competes with its low cost and low price while Tronn competes with its features and specifications. With
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Atlantic Bundle, it is actually possible to shift the target market’s demand for low priced servers (Zink) to
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long-term cost saving servers (Tronn+PESA).

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In conclusion, I would recommend the value-in-use strategy to price this new product. With the combination
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of unique specifications, upgradability, and high cost savings, I believe it is worth the risk to price the

Atlantic Bundle at a higher end, given that it is marketed well to the consumers by presenting its long term

benefits not just financially but also in terms of server versatility. This innovation could yield great profits

for the company and potentially introduce a new trend in the technological industry.

Appendix:
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 CASE STUDY | Atlantic Computer: A Bundle of Pricing Options
Joyce Ann Clarize Galang
Exhibit 1.

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Exhibit 2.
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