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Atlantic Computers: A Bundle of Pricing Options: Marketing-II
Atlantic Computers: A Bundle of Pricing Options: Marketing-II
Atlantic Computers: A Bundle of Pricing Options: Marketing-II
of Pricing Options
Marketing-II
1. Problem Statement
Atlantic Computer is a manufacturer of servers and high-tech products. There are two
segments in server industry: High Performance Server and Basic Server. With increase in
use of internet the market for Basic server is growing. Hence Atlantic has developed a
Basic server, Tronn and a software tool, Performance Enhancing Server Accelerator
(PESA). We have to determine what pricing strategy should be implemented by Atlantic
Computers to price Atlantic Bundle.
1 .Market for basic servers growing at 1. Major player Ontario already has a
a CAGR of 36% 50% share in basic server market
2. Tronn + PESA bundle very high on 2. Ontario had a very flexible and
performance in its application as web innovative supply chain strategy
servers 3. Widely held belief that software
3.Upper hand in value based pricing tools should be provided for free
strategy 4. Unlike Atlantic, Ontario’s had an
online channel for sales
Company :
Atlantic computers is a leading developer of high-tech servers
Largest player in computer industry, selling its high-end performance server –Radia
Providing top notch, highly reliable products and had developed a reputation of
providing high quality , responsive post sales assistance
Planning to launch ‘Atlantic bundle’-new Tronn server and the PESA software tool
Customer :
Company deals with large enterprise customers
Two market segments in server industry- high performance server & basic server
High performance server used by firms for supply chain management, resource
planning, simulation etc.
Basic server used by firms for simple repeatable tasks like ‘Web server’ for
DayTraderJournal.com
Context :
Company is going to launch ‘Atlantic bundle’- Tronn server and the PESA software
tool
PESA-Performance Enhancing Server Accelerator, software tool allowing Tronn to
perform four times faster than its standard speed
Atlantic computer needs to decide the pricing strategy required to be implemented
Available pricing strategies are: Status Quo, Competition Based, Cost-Plus, and
Value in Use pricing. Pricing right for the ‘Atlantic Bundle’ which benefits the firm
and to figure out how the customers and competitors are likely to react and respond
for proposed pricing strategy
Competitors :
Ontario Computers Inc. are the prominent competitor of Atlantic computers
Its Zink product line, a low-end server, claims 50% revenue market share in the basic
server market
Ontario’s servers performed at approximately the same level as Atlantic’s Tronn
Ontario’s majority sales were generated online
Assumption: Volume sales computation has been used according to the method
mentioned in footnote no.5 for cost plus approach, but this has been extended to
other alternative methods too.
Alternative methods of setting the price for the Tronn+PESA bundle
1. Give the software tool away for free and charge only for the hardware
2. Charge a price equal to what the customer would pay for four Ontario Zink
servers.
3. Charge a price based on a cost-plus approach to pricing PESA(based on software
tool’s development costs)
4. Charge a price based on value-in-use pricing.
2. Charge a price equal to what the customer would pay for four Ontario Zink servers.
Profitability analysis:
Revenue
Pricing Alternatives Price/Tronn Server No. of units Revenue(A)
Give software tool for free $ 2,000 10590 $ 2,11,80,000
Charging a price equivalent $ 3,400 10590 $ 3,60,06,000
to price of 4ZINK servers
Cost-Plus Pricing $ 2,245 10590 $ 2,37,73,646
Value-in-use Pricing $ 4,575 10590 $ 4,84,49,250
Costs Profit
Pricing Options Cost per R&D Cost Total cost(B) (A-B)
unit
Status - Quo $ 1,538.00 $ $ $ 28,92,580
Pricing 20,00,000.00 1,82,87,420.00
Competition $ 1,538.00 $ 20,00,000.00 $ $ 1,77,18,580
based Pricing 1,82,87,420.00
Cost-Plus Pricing $ 1,538.00 $ 20,00,000.00 $ $ 54,86,226
1,82,87,420.00
Value-in-use $ 1,538.00 $ 20,00,000.00 $ $ 3,01,61,830
Pricing 1,82,87,420.00
6. Critical Evaluation
Handing out software which required significant development costs freely would
affect the margins of the company. Moreover it would lead to a higher price even for
customers who did not need the enhanced performance. The advantage was that it
went along with the current industry trends and did not disturb the consumption
pattern of the industry.
The strategy could demonstrate that the server together with the software was as good
as 4 servers of the competitor but it could lead to tremendously high retail prices
which may not go down well with the customers.
Pricing on a cost plus basis may not allow the company to fully leverage the value it
could derive from a breakthrough product. People could be willing to pay
significantly more if it met their requirements. Charging a uniform cost plus rate
could thus affect the profitability.
However it could lead to affordable prices that would appeal to a large population.
The Value in method could allow the company to reap the maximum profits.
However it would be difficult to explain all the cost advantages to the customers as
they would have to shell out very high prices this way.