ATALNTIC BUNDLE CASE STUDY

GROUP-M2

GROUP MEMBERS: APOORVA SHARMA, CYRIL ISAAC, MRINAL GOEL, PRAVAN SHETE

PROBLEM STATEMENT

In what ways can Jowar choose an optimum price strategy for the “Atlantic Bundle” and device a
strategy to prevent the reaction of competitor.

LEAD QUESTIONS

Q1. What is the situation that the key protagonist, Jason Jowers, faces?

The industry in which Atlantic Computers competes has two market segments: the traditional,
where Atlantic leads with its flagship product, Radia, which has maintained a 20% market share for
the past 30 years, and the basic server market sector. With a 50% market share because to its Zink
server, Ontario presently has the majority of the rapidly expanding basic server market. With their
new server Tronn, Atlantic hopes to dominate this market sector. When combined with the PESA
tool, Tronn is a competitive choice that might take over this market. PESA is a piece of software that
Atlantic also developed, and it increased the Tronn server's efficiency by four times. The main issue
that Jowers is currently facing is to present the optimum price for the “Atlantic Bundle,” this is one
Tronn server with the PESA software tool. 

Q2. What price should Jower charge for the Atlantic Bundle (i.e., Tronn servers + PESA software
tool)?

The primary rival in this market is Ontario Computer, Inc. It is proud to have a business model
focused on operational excellence and holds 50% of the market for basic servers. It also conducts
the bulk of its sales online. This indicates that they have succeeded in developing a competitive price
advantage by getting rid of a lot of low-value operations and lowering the related expenses.

To determine the price of the server there are four strategies that we have to look through:

1. Status-Quo Pricing:

If Atlantic uses the status quo pricing plan, it indicates that it follows industry practise by just
charging for the server's hardware and providing the PESA tool's software free of charge.

The established price of the server= $2,000

Price of Atlantic Bundle would be = Price of Tronn+ Free PESA software = $2,000
 Pros Cons
Least expensive option available  The option does not account for all the
server’s expenses
 Does not capture the complete value of
the product.
 Amount that has been spent on R&D
($2,000,000) has to be forgone.

2. Competitive-based Pricing

As one Tronn server with PESA works four times quicker than one Zink server, Atlantic will charge
the equivalent of four Zink servers offered by Ontario if it uses the competition-based method.

Conservatively, 2 Tronn Servers are equal to 4 Zinc servers and Aggressively 1 Tronn Server is equal
to 4 Zinc Servers.

Price of 4 Zinc Server= $17,00*4 = $6,800

So, the price of Atlantic Bundle in the two models are:

Conservative Model = $3,400 ($1700*2)

Aggressive Model= $6800 ($1700*4)

Pros Cons
 Deliver value in the form of quality of  It is the most expensive choice for the
performance and cost savings. customers.
 The clients might not recognize the
value addition.

3. Cost Plus Pricing Technique

If Atlantic decides to use the cost-plus pricing technique,

The expected sales in 3 years = (4*50000 + 9*70000+14* 92000)/100 =21180

Cost of Tronn Server $1538

Cost of PESA for each server 2,000,000/10,590= $189
Total cost of Atlantic Bundle $1538+ $189= $1727
Mark up = 30% $1727*0.3= $5.18
Final Price 1727+$518+= 2,245

it will be able to provide a lot for less money than the price determined by the competition and
make it easier to impose the "Atlantic bundle."
It will be difficult to maintain the credibility of the offer as the price difference from the status quo
pricing to this option is just $245/unit but the change in value is $4,050/unit.

This option only generates a Net Profit Value of $3,196,380.88.

4. Value- in -use Pricing Technique:

2 Tronn Servers 4 Zinc Servers Rationale

Price of servers 4000 6800
Electricity expenses 500 1000 Cost is $250 per unit
Cost of license 1500 3000 Cost is $750 per
server
Total cost 6000 10800
Savings by Tronn 4800 0 10800-6000
50% of savings 2400 0 50-50 cost sharing
Final Cost 6400 10800 4000+ 2400

Based on the analysis , Jowers should price the “Atlantic Bundle” at $6,050 using Value in
Pricing . While the most practical and fair option might seem to apply the competition-based
strategy, which would allow Atlantic to maintain the profitability, but credibility within the
customer would be unlikely to be sustainable.
Benefits of choosing Value-in-use Pricing:

 Atlantic Bundle can show more value to their customers by indicating them the
monetary benefits
 If sales rise, Atlantic will also gain 50-50 from profit sharing.
 Also opting for price war is not a good option for Atlantic, since the cost of Tronn is
$1538 and the price of Ontario’s Zinc is $1700. Therefore, Atlantic need to factpr the
cost of PESA as well. If Ontario decides to lower the price, it will be difficult for
Atlantic to sustain itself.

3a. 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?
In Status quo pricing is a strategy where companies mimic the prices of their competitors or
maintain current price points of similar products or services on the market.

 Price of Tronn as mentioned in case study we will take as $2000.

 Since the software tools are expected to be available for free, we don’t consider PESA price.
 It’s mentioned that projected sales of the first year would be 50,000 and it will increase at
the rate of 36%.
 But due to production constraints, with the sales that Atlantic can do (Assuming all the
server produced are sold) the projected market share for the basic segment will be 4% in
2001, 9% in 2002 and 14% in 2003.
 Cost of Tronn is mentioned as per Exhibit 3 is $1538.
 To find the amount left on table over the next three years can be calculated by knowing the
Net Present Value (Which is the difference between the Current investment and the profit
acquired over 3 years with 36% rate).

STATUS QUO PRICING

  STRATEGY    
       
  YEAR 1 YEAR 2 YEAR 3
Basic Server Price 2000 2000 2000
Software Tool Price 0 0 0
Total Sales Price 2000 2000 2000
Market Share 50000 68000 92480
Actaul Market Share Projection 4% 9% 14%
Total Sales 2000 6120 12947
Total Sales Revenue 4000000 12240000 25894400
Cost of Tronn 1538 1538 1538
Cost price of Tronn 3076000 9412560 19912793.6
Total Profit 924000 2827440 5981606.4
Margin Price 462 462 462
       
Total Profit 9733046.4    
Initial Investment 2000000    
Net Present Value $ 13,72,080    

Now, If we are using our competitor-based price strategy, were we charge a price equal to
what the customer would pay for four Ontario Zink servers.

Then we can find the new price and Net Present value as shown in below table;

COMPETITION BASED PRICING STRATEGY

       
  YEAR 1 YEAR 2 YEAR 3
Competetor Price 1700 1700 1700
 Comparison number 4 4 4
Total Sales Price 6800 6800 6800
Market Share 50000 68000 92480
Actaul Market Share Projection 4% 9% 14%
Total Sales 2000 6120 12947
Total Sales Revenue 13600000 41616000 88040960
Cost of Tronn 1538 1538 1538
Cost price of Tronn 3076000 9412560 19912793.6
Total Profit 10524000 32203440 68128166.4
Margin Price 5262 5262 5262
       
Total Profit 110855606.4    
Initial Investment 2000000    
Net Present Value $ 3,64,06,683    

3b. How is Matzer likely to react to your recommendation?

Since Matzer thinks that software tools should often be given to clients for free, he will probably be
hesitant to charge the customers for the software. He does think that the Tronn should be
promoted, though.

concurrently with PESA. He adhered to tradition and set the cost of

the entry-level server for $2,000 Matzer is also a very conservative person, so it's crucial to introduce
the recommendation with 2 Atlantic servers compared with 4 Ontario servers.

4a) How is Cadena’s sales force likely to react to your recommendation?

A. Cadena’s Sales Force will likely resist the recommendation considering the fact that the sales
force is hardware oriented, and our recommendation is to charge for the PESA software and
not give it away, so mostly likely there will be cross questions, but we can make the sales
force understand the importance of banking on the software rather than just hardware.

4b) What can Jowers recommend to get Cadena’s hardware-oriented sales force to understand
and sell the value of the PESA software effectively?

A. The standard company policy to provide software to the clients for free with hardware was a
tradition in the company. However, the policy needs to be changed for “Performance
Enhancing Server Accelerator” (PESA) because of the benefits it provides.  

Combining Tronn and PESA made more sense because PESA would enable Tronn to function
4 times faster, resulting in smoother everyday operations. Tronn was created primarily for
the developing US market for basic servers. This would assist in battling Ontario, which
controlled 50% of the revenue market. Cadena’s sales team would be encouraged and given
 the necessary training to inform consumers about the cost savings that would result from
using fewer servers, less people, less electricity, and fewer software licenses. The company
will win market share from Ontario if all the savings are taken into account. Therefore, we
advice moving forward with Option 4: Charge by Value. The cost of the integrated software
will raise the product's list price, which will increase sales. Consequently, the commission
system for the sales force would aid them in receiving the commission. The organization
should be cohesive and inclusive in order to drive the product in a certain direction.

SOULTION

Jowers offered four options for creating a pricing strategy. The four alternatives have all been
covered above. The fourth alternative, known as "Charge by value," involved charging customers by
dividing the money saved into two equal portions. The fourth choice will make it easier for Atlantic
Computers to capture market share and generate revenue. With this choice, Atlantic Computers
would have to break with history and charge for both Tronn and the software PESA. Because this is a
high-quality product that Atlantic developed, they should charge more because eager buyers will do
so. Longer term savings would also benefit the customer.

The value-based pricing plan will also benefit from the fact that most customers will find it appealing
because it is focused on them and Atlantic