ATLANTIC COMPUTER

A BUNBDLE OF PRICING OPTIONS

By Kanishka Poddar (220)

Case Analysis
In this case, Atlantic Computer is a manufacturer of servers and high-tech
products.

Two market segments exist in the server industry: High performance and
Basic Servers. Atlantic Computers has held a 20% share of the High
Performance market with their Radia servers being their premier product.
However, the market for Basic servers is growing and this has caused
Atlantic Computers to develop and introduce a Basic Server called the
Tronn and a software tool called the Performance Enhancing Server
Accelerator (PESA).

The Tronn was developed mainly for the emerging US market opportunity
for basic servers. The PESA would allow the Tronn to perform up to four
times faster than its standard speed and make frequently requested
information more accessible. Thus, bundling the Tronn and PESA made
more sense.

Atlantic is not concerned that the Tronn will be considered a substitute

for its High Performance servers.
Problem Area
What pricing strategy should Atlantic
Computers implement to price the
Atlantic Bundle?
Pricing Strategy
There are four main types of pricing
strategies which Atlantic Computers can
choose.
First, Atlantic Computers could stay with the status
quo and offer software tools for free.
Second, it could choose competitive based pricing.
Third it could choose from Cost-plus pricing.
Finally, it could choose value-in use pricing.
Status Quo Pricing
This option consider only the cost of
server and treats PESA software as free
product along with servers:

Price of 1 Tronn Server: $2000

2 Tronn Servers + PESA Software (Free) $4000
($2000 x 2)
Price of Atlantic Bundle = $4000
Competition Based Pricing
Pricing the Tronn servers based on price of
competitor server (Zink by Ontario) and
PESA for free.
Since 2 Tronn Server with PESA software is
equivalent to 4 Zink servers:

Price of 1 Zink Server $1700

2 Tronn Server + PESA Software $6800
(4 x $1700)
Price of Atlantic Bundle = $6800
Cost Plus Pricing
Market
volume (in
units) 2001 2002 2003 Total
Market Volume
of Basic Server 50000 70000 92000
Atlantic Share (
in %) 4 9 14
Estimated Total
Sale of Tronn
Server 2000 6300 12880 21180
Estimated Total
Sale of PESA
software (50% of
Tronn Server
Sales) 1000 3150 6440 10590

Cost of Tronn Software $1538

PESA Software Development Cost $2,000,000
 Cost Plus Pricing
Price per server: Cost 30% Markup ($) Total ($)

PESA Cost per server 188.9 56.658 245.52

Cost per Tronn server 1538 461.4 1999.4

Pesa Cost per Server = Total Cost involved/ Total Estimated Sales
= 2000000/10590
= $188.9

After the Markup 30%, as calculated in the above table:

Cost of Atlantic Bundle = $2245

Value-in use Pricing
Considering 4 Zink server is equivalent to
2 Tronn server + 2 PESA software
Amount
Cost Savings ($)
Saving in Electricity 500
Software Licenses 1500
Labour 4000
Cost of Server 2800
Total 8800
As per value pricing model of 50-50% Price of PESA 4400
2 Tronn + 2 PESA 8400
Cost of Atlantic Bundle 4200
 Comparison: Projected Revenue and
Profit for 3 Years
Competition Cost Plus
Particulars Status Quo Based Approach Value in use
Estimated Number
of Units over 3 21180 21180 21180 21180
years
Price Per Atlantic
2000 3400 2245 4200
Bundle ($)
Total Revenue from
42360000 72012000 47549100 88956000
Sales ($)
Variable Cost per
1538 1538 1538 1538
unit ($)
Total Variable Cost
32574840 32574840 32574840 32574840
($)
Fixed Cost for
development of 2000000 2000000 2000000 2000000
PESA ($)

Total Cost (in $) 34574840 34574840 34574840 34574840

Profit (in $) 7785160 37437160 12974260 54381160

Conclusion
On detailed comparative study of 4 different pricing approch for
Tronn Servers & PESA Softwares, it is eveident from the above
chart that Competition Based pricing is the most suitable option.

This approach takes into consideration competitors prices and provides

superior services at same rate.
The market share is already owned by competition to an extent of 50%,
hence price plays a vital role. It needs to highly competitive and at par with
the pricing of competitive products.
Low price does not always means that product will bhe accepted by the
market. If the prices are very low, the market even presumes that the
quality of product if inferior.
If the pricing are very low, competitors can also reduce there prices to that
extent as there product already command certain share in the market.
If prices are too high as given in Value in Use Pricing, then consumer may
not accept the product and would prefer to buy two products of
competition in place of one Tronn Servers.