Atlantic Computers

Pricing for Atlantic Bundle

Submitted to
Dr. Chandan Thakur
Submitted by (Section: B2CD1)
Hasan Armoghan (2014103)
Hitesh Sarda (2014109)
Kunal Batra (2014140)
Nikunj Gulati (2014179)
Parul Rawat (2014192)

1 What price should Jowers charge DayTraderJournal.com for

the Atlantic Bundle (i.e., Tronn servers+PESA software tool)?
Jowers should charge $3,500 per unit of Atlantic Bundle ($2000 for
server + $1500 for PESA). Below are round1 and round 2 benefits:
o Round-1: At $3500 per unit of Atlantic Bundle, customer is paying
$200 more than buying 4 Zink server ($1700 each). But this
additional $200 will help customer to save significant amount on
operational cost.
o Round-2: Per details in the exhibit-1, each additional dollar spent
on acquiring Atlantic Bundle will save $29 a year on operational
activities. This is significant long run saving.
So overall, DayTraderJournal.com will save $5800 from this
transaction. Exhibit-2 shows the calculation of value PESA will create
for DayTraderJournal.com by saving cost for operational activities.
Also, by charging $3500 per unit of Atlantic Bundle, Atlantic Computer
will be able to capture part of the value that will be created due to
PESA tool. The calculation total value created and share of it used to
determine price of PESA are explained in exhibit-2.
1 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?
As shown in the exhibit-3, with status quo pricing, Atlantic Computer
would be foregoing big chunk of money by giving PESA away for
free. Moreover, thinking through the big picture view of overall
industry, Atlantic Bundle is the product that could change (reduce)
the demand (in terms of number of servers in the market. So lower
price can give Atlantic Computer short term benefits of capturing
higher market share but decrease in demand will impact both

revenue and profitability at long run and hence setting up right price
for Atlantic Bundle is very important.

1 How is Matzer likely to react to your recommendations?

Matzer is not going to like $3500/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
$3500/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 hardwareoriented 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, Jowers should recommend using the
calculation per shown in exhibit-1 and exhibit-2. 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.
o 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
(exhibit-2) 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 (round-1) but PESA will give
significant benefits by saving on possession cost (round-2).
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. As shown in exhibit-4, using the data of
DayTraderJournal.com, with Atlantic Bundle round-2 benefits (savings
on possession cost) will still be significant ($5400 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.

Exhibits

Exhibit-1: Operational benefits due to PESA

Total Operational
Savings (one year)
Value Sharing
PESA - Price/unit
Tronn - Price/server
Atlantic Bundle Price/unit
Excess Price
Compared to Zink
Servers
Savings/excess$
Savings/$ of
PESA

$6,000.00
50%
$1,500.0
0
$2,000.00
$3,500.0
0
$200.00
$29.00
$3.87

Exhibit2: Recommended pricing of Atlantic Bundle

# of
Serv
ers
Tronn

Zink

Savin
gs
Total
Savin
gs

Acquisition
Cost
Per
Serve Total
r
$3,50 $7,00
0.00
0.00
$1,70 $6,80
0.00
0.00
-$200.00

Possession Cost
Electri
city

Licen
ses

Admi
n

Total

$500.0
0
$1,000
.00

$1,50
0.00
$3,00
0.00

$4,00
0.00
$8,00
0.00

$6,000.
00
$12,00
0.00

$6,000.00

$5,800.00

Exhibit-3: Revenue comparison of status-quo pricing

with other pricing options
Expected Revenue Atlantic Bundle - Status Quo
Pricing
2001
2002
2003
Total
Expect
ed
1000
3150
6440
10590
Sales
Price/u
$2,000.00
$2,000.00
nit
Status $2,000,0 $6,300,0 $12,880,0 $21,180,0
quo
00.00
00.00
00.00
00.00
Forgone Revenue Atlantic Bundle
Value- $1,500,00 $4,725,00 $9,660,00
$15,885,0
in
0.00
0.00
0.00
00.00
Cost
$245,514. $773,371. $1,581,11
$2,600,00
Plus
64
10
4.26
0.00
Matchi
ng
$1,400,00 $4,410,00 $9,016,00
$14,826,0
Zink
0.00
0.00
0.00
00.00
Price

Exhibit-4: Acquisition and possession cost benefits for

DayTraderJournal.com with reduced price of Zink server

# of
Serv
ers
Tronn

Zink

Savin
gs
Total
Savin
gs

Acquisition
Cost
Per
Serve Total
r
$3,50 $7,00
0.00
0.00
$1,60 $6,40
0.00
0.00
-$600.00

$5,400.00

Possession Cost
Electri
city

Licen
ses

Admi
n

Total

$500.0
0
$1,000
.00

$1,50
0.00
$3,00
0.00

$4,00
0.00
$8,00
0.00

$6,000.
00
$12,00
0.00

$6,000.00