ATLANTIC COMPUTERS

Co mpa ny Ov erview
Atlantic Computers is a manufacturer of Servers and High-tech products; they are known for
providing premium high end servers. Mr. Jason Jowers joined the Company four months back and he was
responsible for the pricing strategy of the ´Atlantic Bundle (A package of the Tronn server and PESA
software tool)

About Tronn and Performance Enhancing Server Accelerator:

The Tronn was developed mainly for the emerging US market opportunity for basic webservers
and it was mainly positioned to cater to the basic level webservers

The ´Performance Enhancing Server Accelerator (PESA) would allow Tronn to perform four times
faster than its usual speed for standard procedures. This helped in enhancing the product
performance of the Tronn and hence the bundling of the two products made sense.

Atlantic Computers in two Market Segments:

There was a presence of two market segments that of a professional high performance server and
a basic entry level server. Atlantic has long been a dominant player in the high-end server market
with over 30 years of experience with a market share of 20% with its respected brand “Radia.”
Atlantic Computers is looking to break into and capture the market for basic servers as well and
hence introduced its basic servers by 2000 and also believed that that the two markets were isolated
and would not be seen as a substitute the high end server market.

Advantages of PESA & Tronn:

 Tronn would serve the purpose of a basic server with efficiency

 PESA will improve Tronn speed by 4 times
 There will be a need to purchase fewer servers
 Lower annual electricity charges
 Less software licensing fee

Now Mr. Jowers’ dilemma is regarding the pricing strategy that should be implemented for the
Atlantic Bundle.
There are four pricing strategies that Atlantic Computers can follow:
1. It can stay with the status quo and offer the PESA for free.
2. It can choose the competitive based pricing.
3. It can opt for Cost-Plus pricing
4. It can use the Value-in use pricing.
 ATLANTIC COMPUTERS
The effect of the different types of pricing is as follows.

Status Quo Pricing

The market distribution is given as follows:

Year 2001 2002 2003 Total

Market Volume (Units) 50000 70000 92000
Market Share of Atlantic 4% 9% 14%
Total Sales 2000 6300 12880 21180

The price of the Tronn server will be used. The PESA software will be given away for free. Hence,
Price of Atlantic bundle = Price of Tronn Server + Free PESA software
= 2000
Total revenue= 2000 * 21180 = 42,360,000
Total Cost = (1538 * 21180) + 2,00,000 = 34,574,840
Profit = TR – TC = 7, 785, 160

Competition Based Pricing

Assuming the performance one Tronn server equals the performance of four Zink Servers
Price of Atlantic Bundle = 4 * Price of Zinc Server(Basic)
= 4 * 1700 = 6800
Total Revenue = 21180 * 6800
= 144,024,000
Total Cost = 34, 574, 840
Profit = TR – TC = 109,449,160

Cost Plus Pricing

The market distribution is given as follows:
Year 2001 2002 2003 Total
Market Volume (Units) 50000 70000 92000
Market Share of Atlantic 4% 9% 14%
Total Sales 2000 6300 12880 21180
Estimated PESA sales 1000 3150 6440 10590
(50%)
 ATLANTIC COMPUTERS

The software development cost for PESA is $20,00,000. The cost of PESA per server will be calculated
by dividing it with the estimated PESA sales.

Cost of Atlantic Tronn 1538

Server
Cost of PESA per server 2000000/10590 =
189
Total cost of Atlantic Bundle 1538 + 189 = 1727
30% Mark Up 1727*0.3 = 518 Hence, the price of Atlantic Bundle = 2245
Final Price 1727+518 = 2245

Total revenue = 2245 * 21180 = 47, 549, 100

Total Cost = (1538 * 21180) + 2,00,000 = 34,574,840
Profit = TR – TC = 12,974,260

Value in use pricing

If we consider two Tronn servers to perform equal to four Zinc servers.

Savings Information Two Zink Servers One Tronn

Server
Electricity Savings 250*2 = 500 250
Software License 750*2 = 1500 750
Savings
Labor Cost Savings 80000/40 = 2000*2 = 2000
4000
Cost of Server 1700*2 = 3400 2000
Total 9400 5000

Total savings= 9400-5000 = 4400

Given that the savings will be split 50-50.
Therefore, both Atlantic Computers and the customer will save 4400/2 = 2200.
Hence, price of Atlantic Bundle = 2000+2200 = 4200
Total Cost = (1538 * 21180) + 2,00,000 = 34,574,840
Total Revenue = 88, 956, 000
Profit= 54,381,160
Competition based pricing should be followed, since it gives the highest profit of around $ 109m.