Atlantic Computers:

A Bundle of Pricing
Options

Submitted by: Group 9

Aashlesha 1811040
Losang 1811446
Shivali 1811119
Sushma 1811358
Shivam 1811241
Amoghvarsha 1811181
Atlantic Computers:
A Bundle of Pricing
Options

Submitted by: Group 9

Aashlesha 1811040
Losang 1811446
Shivali 1811119
Sushma 1811358
Shivam 1811241
Amoghvarsha 1811181
Company & Market Overview (1/2)
About the Company Market Segments

Atlantic Computer: High Performance Servers:

• Large manufacturer of servers and high-tech products
• Server division:
o Sole focus on hardware; not much on software
tools
o Top notch, highly reliable products.
o High quality, responsive post sales assistance.
• Radia - high end performance servers.
• Large enterprise customers.
Ontario Computers (Competitor):
• Catered to the low-end server market
• Zink product line
• Online sales channel
• Product performance at par with Atlantic's offerings
• Oldest and largest segment
• Traditional use of servers for complex
applications.
• Main avenues of use were in Supply Chain
Management, ERP, Business Intelligence
Basic Servers:
• Relatively new market segments
• Basic computing ability for simple repeatable
tasks.
• Main use in showing website information on the
Internet.
Company & Market Overview (2/2)
Demand Growth for Server Markets Atlantic Bundle: The New Product Offering
250000
• Tronn + PESA tool – meet emerging US
200000
marketplace opportunity
150000
• Performance Enhancer Server Accelerator –
100000
allowed Tronn to perform up to four times
50000
0
faster than its standard speed
High End Performance Servers Basic Servers
2000 2001 2002
Problem Statement
Server Market Revenue Share
100%
• What would be the ideal pricing strategy for
80% the Atlantic computer (the target customer
60% chosen as of now is DayTraderJournal.com)
40% from the 4 possible strategies?
20% • How can Cadena use the pricing to drive sales
0% for Atlantic Bundle?
High End Basic Servers
Performance • What is the plausible reaction of the
Servers
competitor Zink?
Atlantic Ontario Competitors
Pricing Strategy (1/3)
Status Quo Pricing Calculations

Price of Hardware = $2000

The conventional strategy adopted Price of Software tool = $0
by the company of charging only Price of Atlantic Bundle = $2000
the hardware at standard price
and giving PESA software tool for Price to customer (conservative estimate) = $4000
free Price to customer (aggressive estimate) = $2000
Price to customer for competitor equivalent= $6800

Competitor Based Pricing Calculations

Price of competitor’s product (Zink) = $1700

Charging a price equal to what the
customer would spend on
Price to customer (conservative estimate) for Atlantic = $3400
required number of competitor’s
Price to customer (aggressive estimate) for Atlantic = $6800
substitutes
Price to customer for competitor equivalent= $6800
Pricing Strategy (2/3)
Cost Plus Pricing Calculations

Cost of Atlantic Tronn Hardware = $1538

Cost of PESA Software = $189
Cost of Atlantic Bundle = $1727
Markup (@ 30%) = $518.1
Price of Atlantic Bundle = $2245.1
The standard costs of the
product are marked up by
Calculating the cost of software:
decided margin percentage,
Expected Sales in next 3 years = (4*50,000)+(9*70,000)+(14*92,000)/100
PESA’s development cost
= 21180 units
would be included in this
Expected number of PESA sales = 50% of 21180
approach
= 10590 units
Cost per PESA = 2000000/10590 = $189

Price to customer (aggressive estimate) = $2245.1

Price to customer for competitor equivalent= $6800
Pricing Strategy (3/3)
Value in Use Pricing Calculations
Price of Atlantic Tronn Hardware = $2000
Price of PESA Software = $0
Base Price of Atlantic Bundle = $2000
Savings to be added (50% of server savings) = $2200
Price of Atlantic Bundle = $4200
The savings that a customer Calculating the savings value:
would realize from 2 Tronn Servers 4 Zink Servers Remarks
purchasing firm’s product as
Electricity 2*$250 = $500 4*$250 = $1000 Annual cost is $250 per server
opposed to requisite
number of substitute Software 2*$750 = $1500 4*$750 = $3000 Average per server installation
Licensing  cost is $750
products. A certain
proportion of these savings Labor  ($80000/40)*2=$4000 ($80000/40)*4=$8000 Salary of administrator is
$80000, each can manage 40
is charged to the customer.
Cost of server 2*$2000= $4000 4*$1700= $6800
Total $10000 $18800 Savings = $4400 per server

Price to customer = $4200

Price to customer for competitor equivalent= $6800
Choosing pricing strategy
Comparing the Prices

Strategy Price  in USD Savings Contribution R&D Cost Breakeven

(per server) (USD) (USD) (USD) (Units)

Status Quo 2000 2800 (conservative) 460 2,000,000 4329

4800 (aggressive)
Competitor 3400 (conservative) 0        (conservative) 1862 1074
Based 6800 (aggressive) 3400 (aggressive) 5262 2,000,000 380
2277 (aggressive)
Cost Based 2245 707 2,000,000 2829
4555 (conservative)
Value in 2600 (aggressive)
4200  2662 2,000,000 752
Use 5200 (conservative)

What do we recommend?

Value in Use pricing recommended

Product Market Fitment
Relative Advantage Target Customers
• Economic – reduction in # of servers, operators, • Based on Applications Tested, we target customers
software license & electricity who have the following applications:
• Better Service & Post-sales support • File Sharing
• Web Servers
Compatibility
• Web servers, File Sharing, e-mail apps, enterprise, The first sale – before meeting and Trade Show
graphics etc
Day Trader Look Sharp
Complexity
Application Web Server File Sharing
• One administrator can manage twice the # of servers
Size 15 65
Trialability Demand 4 basic (1 Tronn) 18* basic (9 Tronn)
• Induce trial by issuing unconditional 2-month money Requirements 3 of 3 met 3 of 3 met
back guarantee for initial 6 months (Appendix) * 18 = 4/15 * 65
• Eliminate perceived risk (1 Tron per 2 Basic Servers)

Observability • The high value customer would be Look Sharp,

• Testimony in Trade Show for potential customers so recommend that as prospect before meeting
and trade show
Internal team (Matzer and Cadena) reactions (1/2)

Traditional way

• Focus on hardware & give away the software for free

• Standard approach to pricing is Cost plus pricing
• Sales force do not have selling experience to sell
software Cutting that first deal

• Propose savings as the perceived value

• In value in use pricing, there is a savings of $2200 per
server – discussed in pricing strategies
• Customer to be chosen – File Sharing
Overcoming the traditional way • Money back can be way to make that first sale

• Test results show PESA adds value to the file sharing

and web servers
• Jason will be able to convince them by actually
selling
Internal team (Matzer and Cadena) reactions (2/2)
Overcoming resistance from Sales team (Cadena)

• By cutting the first deal, Jason will be able to convince that software can be sold

• Advantages for sales team 

• High performance server market is stagnated
• Basic servers is growing at 36%
• With 30% commission-based income, growing category will fetch more commission

• Training should be given to the salespeople to propose total cost of ownership and perceived
value

To go about Trade show

• Jason uses his first order as a testimonial to show how market is reacting to his offering
• DMU members can come, see and learn about money-back guarantee and become champion and
sell it in their company
• Salespeople from different parts can be made part of it to understand how to sell
Ontario's Possible Response
Possible Reaction - 1 Possible Reaction - 2

• Bring down their price to appear more • Develop their own software tool to compete with
attractive vs TRON. ​ PESA 
• However their cost price is 1214 $ whereas • This will take time as developing new tool takes
TRON cost price is 1538 $. time
• TRON is anyway priced higher • Extensive R&D costs 
• Due to domination in higher margin high end • Would lead to an increase in package cost and
servers Atlantic can better sustain in a price reduce attractiveness​
war. Ontario would slowly bleed out. Also
Ontario already sells skeletal server minus any
add-ons to minimize price. Cannot go below.​

Future Response

• Ontario unlikely to trigger price war. For the time being they will concentrate on
low end of basic servers and let Atlanta target rest of basic server segement.​
• Overtime they may develop their own software tool to compete with PESA ​
Recommendations
1. How to price?

Go for Value-in-Use Pricing, second highest profit, second lowest break-even point.

2. Why this pricing method?

Provides better foundation for sales strategy, can show more value to customer by showing monetary benefits, if
sales increase Atlantic will gain proportionally due to 50-50 profit sharing

3. How to deal with competitor response?

In case Ontario tries to imitate, we will still have first-mover advantage. Try to capture maximum share in this
segment in the initial years while there are no other competitors, try to incorporate switching costs.
4. How to deal with customer response?

If there is overwhelming demand, sell servers to most profitable customers; if the response is not as much as
expected continue personal selling to demonstrate the bundle value

5. How to deal with internal sales team response?

If Jason is able to make the sale before the actual Trade show, the sales team will be willing to move from
traditional approach to Value in Use pricing approach & absorb the value based selling skillset actively from Jason
Key Learnings
1. In B2B markets, pricing decisions must identify the firm's objectives and analyse the behaviour of demand, costs
and competition. It should also take into account the perceived value of the product to the customer in order to
maintain healthy customer relationships.

2. Responsive economic strategies can be developed to demonstrate the cost savings/revenue gains that the customers
accrue by selecting our product in place of the next best alternative

3.  We should evaluate the response of all the stakeholders (internal as well as external) affected by new product
introduction in order to get their buy-in before deciding on the price
Appendix - Interview with Industry Expert : Abheek Das, NVIDIA
Q1. How many types of servers do you have ? (Basic, high end, etc.?)
Ans – NVIDIA has 22 different types of servers serving different categories. Out of these, NVIDIA RTX, Tesla, Jetson are used for
supercomputing

Q2. What do customers look for while getting software bundled?

Ans – Customer looks for software that can best leverage the capabilities of the high performing servers

Q3. Products like laptop booster are known to improve the processing speed of computers, does NVIDIA manufacture anything like this?
Ans- NVIDIA can boost the clock frequency, called overclocking the GPU by putting more power to improve compute productivity. But this
can significantly reduce the lifetime of the processor

Q4. How does internal sales force align with the new method of selling?
Ans- NVIDIA follows a partner based selling approach,  this network is segmented for different end use industries

Q5. What does the servers market look like today in terms of key buying criteria?
Ans-Gaming is the fastest growing market, based on that customers will look for servers which have graphic cards with GPU cores. For AI
customers need huge set of data and parallel processing hence high demand for faster speed

Q6.  What’s your view about how should hardware/server pricing be done in the industry today? Should a cost-based markup method /
competitor-based method be used (conventional ones)? Do you think a value-based method is plausible?
Ans- Since NVIDIA operates in a duopoly market, they can charge a premium and still not lose out on customers because they are market
leaders. For large organizations, since value provided is very large, cost-based pricing with premium markups can be a good alternative.
Appendix – Impact of Money Back on Top & Bottom Line
Cost Plus Approach Value Based Approach
Cost 1540 $ 1540 $ Assuming 5% rate of return
Price 2250 $ 4200 $
Number of Units Sold 21,000 11,000 (assume 50% of # servers bought back 550
(over 3 years) sales) Revenue impact per unit, 4300 $
add 100 $ processing charge
Revenue 47.25 M $ 46.20 M $
Profit impact per unit, add 1640 $
Profit 14.91 M $ 29.26 M $ 100 $ processing charge
Impact on Revenue - 2.365 M $ Impact on Revenue 2.365 M $
Impact on Profit - 0.902 M $ Impact on Profit 0.902 M $

Reason for recommendation:

• After money back guarantee, # units sold must increase well above 11,000 units
• Product is superior, so in reality return rate will be <5% (5% is very conservative)
• The products bought back can be resold as refurbished/slightly less price
• Effectively, buy back will increase the sales so that the impact will be neutralised