Analysis - Atlantic Computer: A Bundle of Pricing Options

Introduction

Atlantic Computers, a leading manufacturer of servers and high-tech products is in a dilemma to find
the most suitable pricing options for their new bundle. Atlantic operates in two market segments:

1. Traditional servers: Radia is the premium product

2. Basic servers: This segment is currently dominated by Ontario (Competitor of Atlantic
Computer) with their Zink servers

Atlantic Computers have developed a basic server Tronn, which is combined with the PESA software
and sold as a bundle. Jason Jowars, youngest product manager at Atlantic Computers, is responsible
for deciding the price of the bundle.

Jason Jowers has four pricing alternatives:

a. Status-quo pricing
b. Competition based pricing
c. Cost-plus pricing
d. Value-in-use pricing

Alternative 1: Status Quo Pricing

● Charge for Hardware, Software for free.

● Fails to capture the value of the product

Price of Atlantic Bundle = Price of Tronn + Free PESA Software

= $2,000

Alternative 2: Competition-based Pricing

● Price charges based on competitors - Ontario Zink Servers

● Conservative Approach: Two Tronn equals Four Zink Servers

Price of Atlantic Bundle = Price of 2 Zink Server

= $1700*2
= $3,400

● Aggressive Approach: Each Tronn equals Four Zink Servers

Price of Atlantic Bundle = Price of 4 Zink Server

= $1700*4
= $6,800

Price of Tronn = $2,000

Price of PESA Software = $1,400

Alternative 3: Cost-Plus Pricing

● Calculation based on market share of three years 2001, 2002 and 2003
 ● Mark-up of 30% above cost

Statement showing estimated number of units sold

Particulars 2001 2002 2003
Total Sales 50,000 70,000 92,000

Market Share of Atlantic 4% 9% 14%

Atlantic Sales 2,000 6,300 12,880

Estimated PESA Sales (50%) 1,000 3,750 6,440

Total Atlantic Sales – 21,180 units
Total Estimated Sales – 10590 units
Particulars Amount

Cost Of Tronn Server $1538

Cost of PESA Server (2,000,000/10590) $189

Total Cost of Atlantic ($1538+$189) $1727

Mark-up (30%: $1,727*0.30) $518

Final Price ($1727+$518) $2245

Alternative 4: Value-in- Use Pricing

Considering four Zink servers equal to two Tronn servers with 50:50 savings sharing

Particulars Two Zink Servers One Tronn Server

Electricity 250*2 = $500 $250

Software License 750*2 = $1,500 $750

Labour Cost (80,000/40) *2 = $4,000 $2,000

Cost of Server 1700*2 = $3,400 $2,000

Total $9,400 $5,000

Savings = $(9,400 – 5,000)

= $4,400

Profit sharing = 50% of $4,400

= $2,200

Price of Atlantic Bundle = $(2,000 + 2,200)

= $4,200
Implications of these prices on top-line (revenue) after 3 years

Statement showing Break-even point

Particulars Selling Variable Contribution Fixed Cost Break-even Break-

(Alternatives) Price per Cost per per server (R&D Cost) units even year
server (a) server (b) {c=(a-b)} (d) {e=(d/c)}

Status-Quo $2000 $1,538 $462 $2,000,000 4,329 2002

Pricing
Competition- $6,800 $1,538 $5,262 $2,000,000 380 2001
based Pricing

Cost-plus $2,245 $1,538 $707 $2,000,000 2,829 2002

Pricing
Value-in-use $4,200 $1,538 $2,662 $2,000,000 751 2001
Pricing

Workings

Break-even year:

● Status – Quo Pricing: Number of units sold in 2001: 1,000

Number of units sold in 2002: 3,750

Total Sales till 2002: 4,750 units

Thus, till 2002, Atlantic Bundle can break-even 4,329 units.

● Similarly, in case of Competition-based pricing and Value-in-use pricing, Atlantic Bundle can
break-even in its first year, i.e., 2001

● In case of Cost-plus pricing, as Break-even units is 2,829 units, Atlantic Bundle will break-
even in2002

Implications for consumers:

1. Status Quo Pricing

Historically Atlantic Computers have stuck to the industry norm of pricing software bundles.
This pricing does not include the price of any sort of software tool. There is a risk of
 customers finding Tronn and Zink very comparable. This will lead to customers not finding
Tronn attractive enough and Atlantic Computers struggling to gain any substantial market
share and competing with Ontario in the basic server segment.

2. Competition based pricing

The customer gets lower number of servers compared to competitors as 4 Zink servers are
priced as 2 Tronn servers. Even though the addition of the PESA software compensates for
the lack of servers, the software seldom works as intended in some applications. Moreover,
the customer would only get less hardware for the price they pay, running the risk of the
servers going out of commission. Customers would most likely prefer the bundle of the
competitor as it provides more value for their money

3. Cost plus pricing

If Atlantic opts to implement the Cost-plus pricing strategy, it will be offering a great deal for
a for a lower price than a competition-base price, and it will ease the enforcement of
“Atlantic bundle”.

4. Value in use pricing

This type of pricing is a bit costlier than the usual price range, so customers might be
reluctant at first. Also, customers are habituated with receiving a free software tool with the
servers from Atlantic Computer. The new pricing may lead to critical questioning from the
customers for deviating from their traditional approach.
Thus, to resolve this issue, Atlantic Computer must make the customers realize that the
PESA software is not just an additional software but is capable of doubling or quadrupling
the capabilities of the basic Tronn server. Therefore, consumers will no longer have to make
extra purchases on additional servers henceforth. In the long run they will also be able to
save on the other costs too. Hence, the extra price is justifiable.

Implications on Competitors:

Short term: With the introduction of Tronn servers in the value-in-use pricing range, Zink’s
management might reduce its price in the short run. If such a situation arises then Atlantic
Computer can switch to the cost-plus price range for Tronn. They will then be able to show
their customers how much they are saving compared to Ontario’s Zink servers.
Tronn’s cost-plus price per server = $2,245 and Zink’s cost per server = $1,214.
Since 1 Tronn server incorporated with PESA is as efficient as 4 Zink servers, so total cost of 4
Zink servers = $1,214*4 = $ 4,856.
Therefore, customer’s savings = $4,856 - $2,245 = $2,611
Long term: Ontario Computer might decide to develop a similar software to PESA to
compete with Atlantic Computer in the long run. If that happens, then Atlantic Computer
might have to offer the PESA software free with the hardware like they have done with their
software tools.

Conclusion

From the above analysis we can conclude Value in use Price is the best option as the returns are
faster and better. Also, it will have more positive reactions from the customers.