Atlantic Computer: A Bundle of Pricing Options ( Analysis by Group 8)

1. Identification of the problem

The pricing strategy for Atlantic Computers new product Atlantic Bundle a
combination of Tronn Server and the PESA software tool has to be determined. There are
four options available status quo, competitive based pricing, cost plus pricing & value in
pricing. In addition to that, products target market, competitors and customers reaction
need to be answered.

2. Analysis of the situation and the problem

Option 1 Status Quo In this case we will be following traditional pricing where we will have
to give PESA for free to Tronn Customers which implies we will be forgoing PESA software
development costs of $2,000,000.
Sales Price Per Server

- $2,000

Cost Price Per Server

- $1538

Assuming 4%, 9% and 14% market shares in 2001, 2002 and 2003 respectively we get
21,180 units and loading the cost of R&D for PESA in these items, we get $94.5 per item as
cost.
Therefore, Profit per Server = $2,000 - $1,538 - $94.5 = $367.5
Option 2 Competitive Pricing Pricing as per Ontarios Zink Model
Sales Price Per Server

- $1,700

Cost Price Per Server

- $1538

Assuming 4%, 9% and 14% market shares in 2001, 2002 and 2003 respectively we get
21,180 units and loading the cost of R&D for PESA in these items, we get $94.5 per item as
cost.
Therefore, Profit per Server = $1700 - $1,538 - $94.5 = $67.5
Option 3 Cost Plus Approach with 30% margin.
Total Number of Tronn Servers sold in 3 years

21,180 units

Number of Tronn Servers sold with PESA (Attach Rate = 50%) =

10,590 units

Total R&D Cost of PESA

$2,000,000

Cost per unit of PESA

$188.86

Cost per unit of Tronn Server

$1,538

Total Cost per unit of Tronn Server

$1727

Price per unit of Tronn Server (with 30% mark up)

$2245

Margin Per unit of Tronn Server

$518

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

Conservatively 2 Tronn Servers with PESA is equivalent to 4 Zink Servers.
Cost to Consumer Comparison:

Two Tronn Servers

+PESA

Four Zink Servers

Price of Servers

$4,000

$6,800

Electricity

$500

$1,000

$250 per server

S/W License Cost

$1,500

$3,000

$750 per server

Total Cost

$6,000

$10,800

Remarks

Savings if Consumer chooses Tronn Server Bundle => 10,800 6000 = $4,800
Considering 50-50 Sharing Benefit sharing Basis, Final price of bundle can be $4,000+50% of
$4,800 = $6,400
Margin per two units = $6,400 ($1538*2)-$189 = $3015
Margin per one unit = $3015/2 = $1508

3. Recommendation

As it is evident from above per unit margin calculations, it is advisable to opt

for Option 4 Value-In-Pricing as it has high margin contribution compared to
other options and also this is considering all the benefits that a customer can be
availed if he/she chooses this option.