Background: Atlantic Computer, a large manufacturer of servers and other high-tech products, has

been competing in the server market for 30 years. It is the most successful participant in the overall
computer server industry, particularly in the largest market segment- high performance server. Atlantic
Computer has a reputation for providing top-notch, highly reliable products in addition to providing high
quality, responsive post-sales assistance.

Problem Statement: As part of their overarching strategy based on customer intimacy and product
differentiation, the firm developed a new product, The Atlantic Bundle which consists of a new Tronn
server and the PESA (Performance Enhancement Server Accelerator) software tool. It was developed
specifically to meet an emerging U.S. marketplace opportunity. Atlantic believes the PESA software tool
would be a competitive advantage that would help them corner the market segment for basic servers,
which their competitor Ontario Computer is the market share leader. PESA would allow one basic server
to work so efficiently that it could do the work of four traditional basic servers while providing savings
for the customer. An important issue with PESA is that it was a software tool and customers were
accustomed to receiving software for free along with the hardware. The objective for the product
management team is to figure out the pricing structure and to identify which businesses would benefit
most from this new bundle, how customers will react, and how competitors will respond to the
recommended pricing strategy.

Market Analysis

Atlantics Strengths Atlantics Weaknesses.

The PESA tool efficiency ie can do the
work of several basic servers with one
server.
Less electricity, labor costs, software
licenses.
They are known in the industry from
higher end products.
They have a superior product which will
be more powerful and can perform certain
functions much better.
Industry Norms dictate that software be
given free, making money off the
hardware.
Customers would not like paying for
something they are accustomed to getting
for free.
They know the higher end industry better
than the basic server industry.
Marketing division is not trained
to promote the benefits of
purchasing software along with
hardware.

Ontarios Strengths Ontarios Weaknesses

Brand recognition of the popular basic It would take 4 Zinks to do the job of one
Zink server. Atlantic Bundle.
Already controlled 50% of the low end Greater cost of having to buy more
basic server market share. servers to do the same job as 1 Atlantic
 Operational excellence. Bundle.
Over reliance on basic server market
segment.
More software licenses are needed.
Their product uses more electricity and
labor.

Pricing Options:

Status Quo
2001
Competition 2002
Based 2003
Price of Tronn 200020012000 20022000 2003
Sales Price of
Sales Price of
Tron $2000 $2000 $2000
Tron
Market
PESA Share 50000 68000 92480
Atlantic's 12947.
SALES PRICE of 6800 6800 6800
Demand 2000 6120 2
Bundle
Sales 40000 122400 258944
Market Share 50000 68000 92480
Revenue 00 00 00
Atlantic's 2000 6120 12947.
Demand 2
Cost perRevenue
Sales Tronn 1538
13600015384161601538
880409
Markup 00 00 60
Cost of PESA
Cost per Tronn 1538 1538 1538
Markup
Costper
Cost of PESA
Bundle
cost per bundle
Markup
30760 941256 199127
Sales Price of Bundle
Total Cost 00 0 94

Total Cost 307600

92400 941256
282744 199127
598160
Net Income 0 0 0 0 6 94
Net Income 105240 322034 681281
Per Unit Profit 462 462 462
00 40 66
Development 20000
Per Unit Profit 5262 5262 5262
Costs 00
Development
Break Even 200000
4329.0
Costs
units 04 0
Break Even units 380.08
36

Status Quo Pricing Calculation:

Market Demand: Market demand increases by 36% every year. The three year
market demand was derived by adding the 36% increase based on previous year
demand.
Atlantics Demand: We assumed that, as instructed in the case, the demand for
Atlantics basic server will be 4% in 2001, 9% in 2002 and 14% in 2003.

Break Even = Break even for each of the pricing strategy was calculated by using
the formula: Development costs (2000000)/Per unit Profit.

Competition based Price Calculation:

According to conservative approach 2 Tron server equals to 4 Zink servers.

However, we have used the aggressive approach that equals 1 Tron Server to 4
Zink Servers. Price of 4 Zink servers equals to 6800.

=1700*4=6800.

Cost Plus and Value-in-use approach:

 Cost Plus Approach Value-in-use approach
2001 2002 2003
Sales Price of
Tron
PESA
SALES PRICE of
Bundle 3200 3200 3200
Market Share 50000 68000 92480
Atlantic's 12947.
Demand 2000 6120 2
64000 195840 414310
Sales Revenue 00 00 40

Cost per Tronn 1538 1538 1538

Cost of PESA
cost per bundle
Markup
Sales Price of Bundle

30760 941256 199127

Total Cost 00 0 94

33240 101714 215182

Net Income 00 40 46
Per Unit Profit 1662 1662 1662
Development 20000
2001 2002 2003 Costs 00
Sales 1203.3
Price of Break Even units 69
Tron 1999.4 1999.4 1999.4
PESA 246.82 246.82 246.82
92 92 92
SALES 2246.2 2246.2 2246.229
PRICE 29 29
of
Bundle
Market Share 50000 68000 92480
Atlantic's 2000 6120 12947.
Demand 2
Sales Revenue 44924 137469 290823
58 23 79

Cost 1538 1538 1538

per
Tronn
Cost of PESA 189.86 189.86 189.86
86 86 86
cost per bundle 1727.8 1727.8 1727.8
Cost Plus Calculation:

Components Result Calculation

Sales in 3 21067.2 (50000*.04 + 68000*.09+
years(expected) 92480*.14)
No. of PESA 10533.6 50% 21067.2
Cost of PESA 189.8686 2000000/10533.6
Bundle Cost 1727.869 (1538+189.86)
Mark Up (30%) 518.36 1727.86*.30
Sales Price 2246.229 (1727.56+5718.36)

value in use pricing(Savings)

Cost 2 Tron 4 Zink

Electricity 500 1000
Software 1500 3000
Servers 4000 6800 As Znk server costs 1700
For One Year( Conservative) For Three years
Total 6000 10800 Total 18000 32400

saving 4800 Saving 14400

Split 2400 Split 7200
Original Price 2
Original Price 2 Tron 4000 trons 4000
Value based price 6400 Value based price 11200

Price Per Server 3200 Price per server 5600

Evaluation of the strategies: Based on the calculations, the following comments

can be made for each of the options.

Status Quo-Option-1: This is the lowest priced option. The main disadvantage of this
option is that it doesnt take into account the entirety of the cost associated with
the server. Often, total value of the whole bundle is not counted as PESA software
tool is given away as free. Moreover, the development cost for PESA is also not
taken into consideration, resulting in higher break even unit points.

Option-2-Competition based pricing: This option provides the highest price. This
suggests that Atlantic charge a price equal to what the customer would pay for four
Ontario Zinc Server. This option doesnt provide any competitive edge because
customers cannot save money as they are paying four times the price of basic Zink
server. However, the break even point can be achieved much earlier than any other
option.

Option 3-Cost Plus Pricing Approach: This option takes into consideration all the
development costs. It provides more accurate representation of Atlantics core
products. The bundle pricing provides a logical ground to maximize the profitability
of Server. However, per unit profit is not as high as competition based pricing and
break even point is achieved at 2829 units sold.

Option 4-Value-in-use Pricing: This option focuses on the entirety of the customers
costs associated with owning a server. All the benefits and savings enjoyed by
customers are quantified and well presented to them. From a conservative stand
point, if we compare 2 Tron server with 4 Zink(as suggested in the case), the price
we get is 3200. This provides a per unit profit of 1662 and break even units of 1203.

Our Recommendation: We recommend Atlantic Computer use value-in-use pricing

strategies for a bundle of reasons. Based on the profit and revenue figure,
competition based pricing(option2) seems more promising. However, the profit and
revenue amounts should not be the only criteria while choosing price. The following
reasons can be pointed out.

A better marketing tool as it can present more value to customers by showing

them the savings they can make.
The 50-50 profit sharing is applicable when the sales increase. Hence, the
more the sales, more the per unit profit can be achieved.
If customers convinced once, the competitors will fall behind in the race as it
is impossible to match the long term savings benefits.
From a monetary perspective, Atlantics choosing of other options over value-
in-use can jeopardize its sales because cost of Tron itself is $1538 while
Ontarios sales price is $1700. If price war happens, Atlantic will surely lose
its sales. Hence, adopting a value-in-use pricing will provide a competitive
advantage to Atlantic.

Internal objections: The objections may arise within the company if value-in-use
pricing is used.
 a. Matzar believes that software tools should be provided free and Cadena, in
charge of sales, is also not trained to deal with server without free software
tool. The strong belief and standard industry practice to give software
package free will make it harder to implement.
b. Matzar may be reluctant to try new approach as Matzar used to depend on
cost plus pricing approach in the past.
c. Cadena may also show objections to this strategy as she was not invited to
the original meeting about the Atlantic Bundle. Besides, requirement for
training will make Cadenas job harder.
d. As 30% of the sales force salary consists of commission based on sales, they
will prefer the competition based pricing. Value-in-use pricing will not bring
the highest profit for them.
e. Major objections may come from sales force as they may perceive that they
will have to work harder since the software is not free.

Objections from Customer: Customers may have initial hesitance at new product
and pricing structure. They may fret over the software tool not included in pricing.
The price is higher than the traditional approach, giving customers a reason to
dispute.

Strategies to address the concerns: The following strategies can be proposed to

overcome the objections.

a. Providing training to sales people and make sure that they understand
financial benefits.
b. Demonstrating the long term benefits with data, convincing both Matzar and
Cadenas team.
c. Providing the sales team with the tools that can help highlight the savings
and advantages in software licenses, electricity and other costs.
d. Clarifying the commission percentage to Sales force and showing them how
the value-in-use pricing can maximize their income.
e. Convincing Cadena that his input is the key to success in this entire process.
f. Customers objections can be tackled by emphasizing on lower acquisition and
possession costs.
g. Ensuring after sales service for the customers and building relationship with
them.

Ontarios reactions to recommended pricing formats: Ontario, in the short

run, may reduce the price of its servers, offer a similar products with lower price,
increase advertising or offer a complement for free. However, the most probable
reaction would be to reduce the price as Ontario runs on cost efficient supply chain
management. If Ontario starts a price war, Atlantic has to create a brand image and
increase the marketing expenditure.

Conclusion: Based on the brand image, expansion into a basic server market will
definitely contribute to its financial health. Although value in use pricing is not the
best price in the market, a proper utilization of this strategy by targeting a specific
segment will maximize the profitability. A coordinated approach encompassing all
the major departments such sales, marketing and executive teams is a prerequisite
to get the most out of this value based approach.