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PRICING STRATEGY

ATLANTIC COMPUTERS:
A Bundle of Pricing Option

Submitted By -APURVA JHUNJHUNWAL


AVNI AGARWAL
GAURAV MUKIM
GAURAV VIJ

Submitted to -Dr CHANDAN THAKUR

2014-16

1. What price should Jowers charge DayTraderJournal.com for the Atlantic Bundle
(i.e.,Tronn servers+PESA software tool)?

Using the Value-in-use pricing method, Atlantic Computers would determine the value
that each customer would realize from the purchase of the product. Customer value can
be defined as the worth, in monetary terms, of the technical, service, social, and
economic benefits a customer receives in exchange for the price it pays for a product. In
this case, the customer value would be the annual cost of electricity and software
licensing for each server. It would then calculate the difference between the two figures
and assume a 50-50 share of savings.

Of the four methods available for pricing the Atlantic Bundle, the Value-Based pricing
method is the best to choose. The Competition Based pricing method will generate more
profit per unit than any other method, it will not allow Atlantic Computers to fully
demonstrate, in monetary terms, the true value of the Atlantic Bundle. The value-inuse pricing method allows Atlantic Computers to demonstrate to customers the true
value of their product. Because the Atlantic Bundle is a basic server and software tool
that allows it to operate at four times the speed, it is equivalent to four Zink servers.
Conservatively looking at the numbers, this equates to a savings of $7,800 or $4,800 to a
customer. Additionally, Atlantic Computers will share in the savings of customers,
further adding to their profits.

2. Think broadly about the top-line revenue implications from each of the four
alternative pricing strategies. Approximately how much money over the next three
years will be left on the table if the firm were to give away the software tool away
for free (i.e., status quo pricing) versus utilizing one of the other pricing
approaches?
1. Status Quo Pricing:
The industry norm for pricing a server and software bundle is to merely include any
software tools with the hardware. Atlantic Computers has always practiced this pricing
strategy. This would require Atlantic Computers to offer the PESA software tool for free
with the Tronn Server. This would require Atlantic Computers to essentially lose the
$2,000,000 cost of research and development of PESA. Additionally, the Tronn Server
would appear to customers as very comparable to the Zink servers and it would make it
difficult for Atlantic Computers to compete with and gain market shares in the basic
servers segment.

Table 1: STATUS QUO

2. Competition-Based Pricing:
Competition-Based pricing uses the prices of competitors as a benchmark for pricing
products rather than considering costs. The price of Ontarios Zink servers is $1700 and
conservatively speaking, the Tronn loaded with the PESA software tool is equivalent to
two of Ontarios Zink servers. Therefore, under the Competition-Based Pricing, the cost
of the Atlantic Bundle would be $1700 x 2 or $3400. While selling at this price would
generate more profits for Atlantic Computers, it is not certain that consumers would
purchase the Atlantic Bundle at this price.
Consumers would see that they are only getting two Tronn server that costs 4 times
the cost of the Zink server. While the addition of the PESA software tool would make the
Tronn servers the equivalent of 4 Zink servers, the PESA software does not work on all
software applications.Furthermore, customers would need further justification to have
only half of the hardware and run the risk of one or both servers being out of
commission for any given amount of time. Customers would likely not consider
purchasing the Atlantic Bundle based on Competition-Based pricing because they
would not see it as a fair price and worth the risk.

Table 2: COMPETITION BASED PRICING

3. Cost-Plus Pricing:
Cost-plus pricing is determined by adding the direct, indirect and fixed costs
associated with a product and converting it into a per-unit cost for the product. A
predetermined percentage is then added to these costs to provide a profit margin. The
cost of a Tronn server is $1,538 and based on a $2,000 price, this additional markup is
approximately 30% . Adding 30% to the cost of PESA would make the price $189. As the
chart below details, under the cost-plus method, the price of a Tronn loaded with PESA
would be $2,245 which is $545 above the Zink server. Because we are looking at this
conservatively, we will assume that two Tronn servers are the equivalent of four Zink
servers. Therefore, it would cost $4,492 as compared to $6,800 for the Zink servers.
Again, It would be difficult for Atlantic to persuade customers to purchase the servers
based on the Cost-Plus pricing because customers would still only see that they are
getting two servers for $4,492 whereas they could get two Zink servers for $3,400 and
that is $1,092 more expensive than Ontarios Zink servers. Without further justification,
customers are not likely to accept this additional cost.

4. Value-in-use Pricing:
Using the Value-in-use pricing method, Atlantic Computers would determine the
value that each customer would realize from the purchase of the product. Customer
value can be defined as the worth, in monetary terms, of the technical, service, social,
and economic benefits a customer receives in exchange for the price it pays for a
product.1 In this case, the customer value would be the annual cost of electricity and
software licensing for each server. It would then calculate the difference between the
two figures and assume a 50-50 share of savings.
As the chart below illustrates, when the total costs are added, a customer would
potentially realize a $4,800 savings when using two Atlantic Bundles as compared to
four Zink servers. After a 50-50 share, the total final price would be $6,400. Under this
method, it is easy to show customers that they will be saving $2,400 when they buy two
Atlantic Bundles. This would help demonstrate in monetary terms the customers true
value of buying the Atlantic Bundle.

Table 4: VALUE PRICING

3. How is Matzer likely to react to your recommendations?


Matzer is not going to like $4200/unit of Atlantic Bundle. As details provided in the
case, Matzer has done thorough analysis of potential of market for basic servers.
The demand for basis servers is going to increase rapidly in coming years and it is
key for Atlantic Computer to start penetrating in this market in order to increase
overall revenue. With this view, he decided to develop a new product line in the
basic server segment. Now, Ontario Computer is dominating this market and
selling servers that best serves customers' need at lower price is the main reason
behind their success.
So Matzer would be more inclined towards penetrating market with aggressive
pricing and this why he will not agree with pricing Atlantic Bundle for $3500/unit.
4.

(A) How is Cadenas sales force likely to react to your recommendation?


As Cadena's sales force salary structure was 70% salary and 30% commission
(assuming that commission is based on the sales and not on number of units), they
would be fine to sell Atlantic Bundle for $4200/unit. Selling bundle at
recommended price will earn them almost double commission compared to selling
the bundle at $2000/unit.

(B) What can Jowers recommend to get Cadenas hardware-oriented sales


force to understand and sell the value of the PESA software effectively?
The industry norm is to give away software tool and price for the server only. But
here, it is the software tool that is going to create most of the value both for
customers and for Atlantic Computers. Hence it is very important to communicate
to customers how and how much PESA can help them to save. The only effective
way to communicate this is charging appropriate price for PESA.
So to get Cadena's sales force to understand the value of PESA and sell it at
appropriate price. Each sales person should be knowing the calculations to find
overall value that PESA can create and how we are determining the price of the
software by sharing a portion of overall value.
5. How are customers in the firms target market likely to react to your
recommended pricing strategy? What response can be provided to overcome any
objections?
At first sight customers would not like recommended pricing for Atlantic Bundle as
o

They would find the per server cost for Atlantic Bundle much higher (double)
than that of Zink.

Being unaware of the capabilities of PESA, they would not prefer to pay for
the tool.

The model that we used to determine price for DayTraderJournal.com will be a


useful tool to showcase the overall value created by Atlantic Bundle in terms of
savings on operational activities throughout the lifetime of the server. Customers
will not see much benefit with acquisition cost saving but PESA will give significant
benefits by saving on possession cost. Showcasing customers that server with
PESA loaded onto it will cut down the number of servers required to server the
purpose by half and this will be the source of cost saving will help customers to
realize the benefits of purchasing Atlantic Bundle and using it for long term.

6. How is Ontario Zinks senior management team likely to react to the Atlantic
bundle?
Ontario's senior management is not expected to reduce the price of Zink server as
to give more of round-1 benefits (acquisition cost savings) because reducing price
will impact their profitability for short term without gaining much of benefits (in
terms of greater market share) at long run. At current price of $1700 per Zink
server, Ontario is earning at 40% of profit margin. Suppose that to match with
Atlantic Computer's profit margin for Tron server (without PESA) of 30%, Ontario
reduces the price of Zink server by $100 per server; it will not be able to create
significant value in terms of lower acquisition cost as compared to that with
Atlantic Bundle. Even after reducing the price of Zink server, due to the fact that
number of servers required for meeting processing needs is not going to change,
operational costs will remain higher compared to that with Atlantic Bundle. Using
the data of DayTraderJournal.com, with Atlantic Bundle round-2 benefits (savings
on possession cost) will still be significant ($8800 per year) comparing the
operational cost of number of required Zink servers.
So per game theory, the most likely action that Ontario Zink's senior management
is expected to take is finding ways to enhance performance of the server to bridge
the gap between number of servers required to achieve required level of
performance. Also, at short run they are expected to react with aggressive
marketing campaign on the basis of lower price and related acquisition benefits.