Atlantic Computer

A Bundle of Pricing Options

Agenda
Situation Analysis
About Atlantic Computers
Products and Market Share
Competitors
About “Atlantic Bundle”
Problem Statement
Pricing Options
Evaluation Criteria
Evaluating Options
Recommendations
Contingency Plan
Conclusion
About Atlantic Computer
Manufacturer of servers and high-tech products
Largest player in the computer industry for 30 years
Provides top-notch, highly reliable products
High-quality and responsive post-sales assistance
Products
High-end performance servers
 Radia servers | 20% market share
Basic servers
 Entering a new and emerging market with newly developed Tronn
and PESA (Performance Enhancing Server Accelerator) software
tool
Marketing at Atlantic Computers
Given away software tools for free since company
put limited emphasis on developing and selling
software tools
High-touch direct sales channel. No online channel.
Sales force compensation structure of 70% salary and
30% commission
What is Atlantic Bundle
Consists of a Tronn server and the PESA software tool
Products developed for emerging basic server market
PESA software enables the Tronn server to perform up
to 4 times faster than its standard speed
File Sharing: 2x faster
Web Servers: 4x faster
Other applications (high performance workloads,
graphics, enterprise, email): almost similar performance
PESA is not effective with high-end servers
Competitors
Ontario Computers Inc.
Market leader in basic server market with 50% market share
Focus only on basic server market
Zink product line
Business Model
 Operational excellence
 Competes on price

 Majority of sales generated online

Other small vendors

50% market share
Problem Statement
Jason Jowers, newly appointed Product Manager, has
to formulate the pricing strategy for “Atlantic Bundle”
(the new Tronn server and the PESA software tool)

Which businesses are most likely to benefit from

“Atlantic Bundle”

Address the main competitor’s reaction

Evaluation Criteria
Price and performance per unit should be comparable
with similar products available in the market
Savings in the chosen pricing option should be the
maximum
Invoke least negative reactions from the buyers
Acceptable by Sr. Management
Pricing Options
Status Quo Pricing
Charge only for Tronn server and give PESA software tool for
free
Competition Based Pricing
Charge a price equal to that of 4 Zink servers
Cost-plus Pricing
Calculate a price by adding a fixed margin to development
cost
Value Based Pricing
Demonstrate the saving from first-order (upfront) and
second-order (electricity, software licensing fee etc.)
Status-quo Pricing
Atlantic Tronn Servers (2) + Free PESA
= $ 4000
$ 4000 for two Tronn Servers and
Stick with tradition by not charging
for PESA software tool
Competition Based Pricing
Ontario Zinc Servers(4*1700) +
Not Applicable
= $ 6800
$ 4000 for two Tronn Servers and
$ 2800 for PESA ($ 1400 per PESAServer)
Cost Plus Pricing
 PESA cost per server
Share units 2001 2002 2003 Total
Basic Segment 2000 6300 12880 21180
PESA Shipments (@50 % attach) 1000 3150 6440 10590
Per Unit PESA Cost
PESA R&D 2000000
Total Units 10590
Unit Cost 188.8574
PESA unit Price with 30 % Margin
Unit Cost*30 % Margin 188.8574
PESA Price 245.5146

Total Price for 2 Servers with PESA

Two Servers 4000
2* PESA 491.03
Total Price $ 4491

= $ 4491
Value in Use Pricing
 Savings to Buyers VS 50 % Share Saving with
Source of Savings Buying 4 Ontario Zinks Customer
Only Two Tronn Servers
(6800-4000) 2800 1400

Less Labour 4000 2000

Less Electricity 500 250

Less Additional
Software Application
Licenses 1500 750

Total Savings 8800 4400

Price for PESA ($ 4400
per Machine) 8800 4400
Price for Two Tronn
Servers 4000 4000
Total Price Based on
Maximum Value 12800 8400
Assuming 10590 Tronn Servers + PESA sold over
3 years Money left on the table would be??
Option a Status Quo Pricing 42360000
Competition Based
Option b Pricing 72012000
Option c Cost Plus Pricing 47560000
Value in use Pricing
Option d (Maximum Value) 135552000
Value in Use Pricing
Option e (Shared Value) 88956000
How is Matzer likely to react
to your recommendations?
Initial Resist
Special Bid for Special Customer
How is Cadena’s sales force likely to
react to your recommendations?
Compensation Plan
70 % + 30 %
What can Jowers recommend to
get Cadena’s hardware-oriented
sales force to understand and
sell the value of the PESA
software effectively?
1. Educate the Sales force
2. Get early customer references
3. Establish an ‘overlay’ Sales
team
4. Communication Planning
5. Sales force Incentives
How are customers in your target
market likely to react to your
recommended pricing strategy?
What response can be provided
to overcome any objections?
 Likely Objections
We do not have the cash flow to substantiate such a
large initial outlay, so we think that the cheaper
Ontario Zinks are better for us

Response
The savings by year end will more than offset
the price, so you will actually be paying less
 Likely Objections
Can you guarantee that we will achieve the 4X
savings results? What if we do not

Response
We have generated a conservative estimate
of the savings of 2 X, although the
preliminary tests suggest that the savings
can be even higher
 Likely Objections
Ontario says that they are willing to lower the price
to 1,214

Response
Our Pricing plans are already in place to
share the savings with you. Even with
Ontario cutting their price to cost, you will
save with Atlantic in one year
 Likely Objections
What happens if one of the two servers I buy breaks
down? Is not there a great risk of having only one
remaining operational server?

Response
As long as you have one server, you will still
be functional at least at 50 %. Restoration
time is quick from the very reputable
Atlantic. So the likelihood that you will
experience any long term performance is
very low. In more than 2 server
configurations, this is a non issue
Ontario's Reactions ?
 Ontario's Business Model
Operational Excellence: so can
not develop directly against PESA

Will not reduce the price, as

demand is increasing

Size of the pie is increasing

Recommendations
&
Conclusions
Conclusion
Ideal World
Price Sensitivity
Demand Curve

 Other factors influencing pricing

Quality of after sale service
Halo effect from mother brand
Transaction costs (Preferred Vendor)

Do I need to push Zink to a price war ?

Thank you!