Marketing Management II

Case Analysis on “Atlantic Computer – A Bundle of

Pricing Option”

NAME : KUNDAN
ROLL NO: MP 15020
BATCH : PGDM(PT) 2015-18
XLRI , JAMSHEDPUR
1
 Agenda

 Case Summary
 Case Objective
 Product Description
 Market Analysis
 Pricing Options – Detailed Analysis
 Recommended Price to Customer
 Overall Recommendation

2
 Case Summary
 Jason Jowers, Product Manager, responsible for developing
the pricing strategy for Atlantic Computer’s, “Atlantic
Bundle” (Tronn server & PESA software tool)
 Two main market segments
 High-end
 Basic
 Atlantic Computer Inc. is known for its high-end server
 Market for servers swinging to more basic models with the
introduction and growth of the internet.
 Atlantic Computer Inc. Developed a new product called
“Atlantic Bundle” (includes the Tronn server & PESA
software tool) to compete in basic server market segment.

3
 Case Summary Cont’d.....
 Atlantic bundle offers superior performance compared to
competitive product (Zink).
 Customer could receive the same level of performance by
buying one Atlantic bundle as four basic servers.
 Software packages are generally given away with
purchase of hardware (industry standard).

4
 Case Objective
• Implement the pricing strategy for the “Atlantic Bundle”.

 Determine how the competition might react to the chosen

pricing strategy.

 Prepare responses to overcome potential customer

objectives to the pricing strategy

 High performance servers and basic servers as not

considered substitutes.

 Demonstrate savings of short-term vs long term

investments.
5
 Product Description

Objective is to sell the “Atlantic Bundle” which includes two

parts :
 Tronn Server
 Developed specifically to meet an emerging US marketplace
opportunity.
 Need to sell the server with the PESA software tool

• PESA Software Tool

• Allows the Tronn server to perform up to four times faster
than its standard speed
• Designed to make frequently requested information(files,
data, pictures) extremely accessible

6
 Atlantic Computer Inc. Vs Ontario (Competitor) :
Atlantic Computer Inc.
Largest player in the overall computer
industry
Known for its high-end performance
servers (Radia) to large enterprise
Sells top notch, highly reliable products,
high quality and great post-sale service.
Business model focuses on customer
intimacy and product differentiation
Sales approach is high touch direct sales
channel(70% salary & 30% commission
7
Ontario
Dominates the market for basic servers
Zink product line claims 50% revenue
market share
Zink servers perform at about same
level as the Tronn.
Majority of sales generated online
Business model focuses on operational
excellence
Low cost structure and competes on
price.
 Projected Market Volume by segment (Units)
350000
300000
250000 High Performance segment
200000 (Units)
Basic Segment (Units)
150000
100000 Year

50000
0
2001 2002 2003

Year 2001 2002 2003

Basic Segment (Units) 50,000 70,000 92,000
High Performance segment (Units) 2,00,000 2,05,500 2,10,500
Total Estimated Market for
2,50,000 2,75,000 3,02,500
Servers(Units)
Atlantic's Basic server % of total Mkt 4% 9% 14%
Atlantic's Basic server Market
2000 6300 12880
Share(Units)
Cost per server 1538 1538 1538
Projected Sales $ (Atlantic) 4000000 12600000 25760000
8 Projected Cost $ (Atlantic) 3076000 9689400 19809440
 Pricing Option

 Option 1- Charge only for hardware and gives

PESA software tool away for free(industry standard).

 Option 2- Charge a price equal to what the

customer would pay for four Ontario zink server.

 Option 3- Charge a price based on cost plus

approach to pricing PESA (based on software tools
development cost).

 Option 4- Apply value-in use pricing.

9
 Pricing Option 1- Charge only for hardware and gives
PESA software tool away for free(industry standard).
Option 1 Traditional Pricing
2001 2002 2003
Atlantic's Basic server Market
2000 6300 12880
Share(Units)
Tronn Sales price ($) 2000 2000 2000
Projected Sales ($) 4000000 12600000 25760000
Tronn Cost price ($) 1538 1538 1538
Less Cost ($) -3076000 -9689400 -19809440
Total Profit 924000 2910600 5950560 9785160
Less PESA R&D Cost -20,00,000
Accumulated Profit/ Money in Hand after 3 years 77,85,160

Advantage :
1. Present path of least resistance for internal colleagues

Disadvantage :
1. Does not consider cost of software
2. By giving away software it devaluate the whole package
10
 Pricing Option 2- Charge a price equal to what the
customer would pay for four Ontario zink server.
Zink Pricing ( 1 Tronn= 4 Zink)
2001 2002 2003
Atlantic's Basic server Market
2000 6300 12880
Share(Units)
Tronn Sales price ($) 6800 6800 6800
Projected Sales ($) 13600000 42840000 87584000
Tronn Cost price ($) 4856 4856 4856
Less Cost ($) -3076000 -9689400 -19809440
Profit 10524000 33150600 67774560 111449160
Less PESA
R&D Cost -20,00,000
Total Profit Accumulated/ Money in hand after 3 years 1094,49,160

Advantage :
1. Profitable if strategy works.
2. Gives customer a sense of saving.

Disadvantage :
1. Risk that the customer may perceive having four servers as more powerful.
2. Customer may question price strategy and expects a lower price.
11
 Pricing Option 3- Charge a price based on cost plus
approach to pricing PESA (based on software tools
development cost).
Cost Plus Analysis
2001 2002 2003
Atlantic's Basic server
2000 6300 12880
Market Share(Units)
Tronn Sales price ($) 1726.86 1726.86 1726.86
Projected Sales ($) 3453720 10879218 22241956.8
Tronn Cost price ($) 4856 4856 4856
Less Cost ($) -3076000 -9689400 -19809440
Profit 377720 1189818 2432516.8 4000054.8
Less PESA R&D Cost -20,00,000
Total Profit Accumulated/ Money in hand after 3 years 20,00,055

Advantage :
1. No change in strategy.
2. Proven to be profitable
3. Attractive price in eyes of customer
Disadvantage :
1. Leaves less money at the end of 3 years ( $ 20,00,55)
12
 Pricing Option 4- Apply value-in use pricing.
Option 1 - Aggressive
1 Tronn 4 Zink
Tronn Price ( $) 2000 6800
Other Expenses (Electricity + Cost of
Software licenses ($) 1000 4000
Total Costs ($) 3000 10800
Total Savings ($) 7800
Final Price charged to customer (Total price
5900
+ 50% of saving)
Price per server ($) 5900
Option 2- Conservative
2 tronn 4 Zink
Tronn Price ( $) 4000 6800
Other Expenses (Electricity + Cost of
2000 4000
Software licenses ($)
Total Costs ($) 6000 10800
Total Savings ($) 4800
Final Price charged to customer (Total price
6400(for 2 server)
+ 50% of saving)
Price per server ($) 3200

13
 Value-in use pricing Cont’d......

Advantage :
 If customers are convinced, competitors can potentially
be shut out as they can’t match the long term savings
benefit
 Creates a true sales strategy for the company.
 Presents all operational costs associated with the
purchase(license and electricity)
Disadvantage :
 New approach that will require intensive training with the
sales force.
 Risk of rejection
 Price is higher than the traditional approach.

14
 Recommended Price to Customer
 Recommended price to DayTrader.com considering the
four pricing options :
Option No. Package Price ($)

Option 1 Free Software 2000

Option 2 Same as 4 Zink 6800

servers

Option 3 Cost Plus 1726

Option 4 Value-in 3640

15
 Money in hand over next 3 years
How much money over the next 3 years will be left in hand if the firm were
to give software tool for free (i.e status quo ) vs utilizing one of the other
pricing options.

Option No. Description Value ($)

Option 1 Status quo pricing 7785160

Option 2 Status quo will leave over $100 109449160

million in hand

Option 3 Status quo has better profit. In 2000000

this case cost plus leaves about
$5 million on the table

Option 4 Status quo leaves about $35 42520360

million

16
 Overall Recommendation
Value-in Pricing Model
 With this model, Atlantic Computer Inc. will see a rise in
profits but may lose some market share.

 By providing savings over time, Atlantic Computer Inc.

will see an increase in customer loyalty.

 This strategy differentiates Atlantic from the other

competitors.

 This strategy avoids entering into a price war that Atlantic

Computer ultimately will not win.

17
18