MM Assignment: Atlantic Computer: A Bundle of Pricing Options

Name: Aman Deo

Roll No. PGP/26/123
Section: C
Instructor: Prof. Joffi Thomas
1.What price should Jowers charge Daytraderjournal.com do the Atlantic Bundle (i.e., Tronn Servers
+PESA software tool)? Calculate the prices for alternative pricing strategies. (Note from the Planning
the Strategy section in the case that Jowers make a conservative estimate that two Tronn servers plays
PESA equals the performance of four Ontario Zink servers.)

Atlantic Bundle – Pricing Strategy

To meet the growing market opportunities Atlantic computers have developed a basic server called
‘Tronn’ with a software tool PESA (Performance Enhancing Server Application). The updated
software would allow Tronn to operate at a higher speed (approximately four times) than its original
speed to access more information. Atlantic needs to select a market segment with a best pricing
strategy to position its high performance product to the emerging US market requirement.

Method 1-Status-quo pricing

If Atlantic has to follow the status quo pricing it has to offer the high performance PESA software
with Tronn hardware for free following the pricing strategy existing in the company. Atlantic cannot
do so because it has incurred a huge R&D expenditure approximately 20 million dollars to develop
the high performance software. The Tronn server with a PESA software tool would offer similar
application usage as that of Zink. Therefore there would be a good response for the Tronn server as it
is being compared with the Zink server by the users. Atlantic has to fix a competitive pricing strategy
and the market segment.

Method 2 – Competition based pricing

The pricing should be based on the existing competition in the market. The existing price of the
competitors product is the benchmark to arrive at the competitive price rather than considering the
product's cost. The existing market price of Ontario’s Zink server is $1700 USD. Tronn loaded with
the Atlantic bundle PESA software would be equivalent to two Zink servers. The price of the Tronn
server would be two times that of the Zink server, which is $3400 USD. When the cost-effective Zink
server is available it would be difficult for the Atlantic to differ its Tronn server at a cost of two times
higher the software applications of the Tronn server is another performance factor that the Atlantic
needs to analyse. Therefore, Atlantic bundle cannot follow the competition-based pricing method to
penetrate the market as already a similar server with better application-based software available in the
market.

Method 3 – Cost Plus pricing

In Cost-plus pricing, the direct material cost, labour cost and overheads which are obtained during the
process of producing the product. Then a mark up percentage is added to the cost to fix the price for
the product. As per the data available from industry sources the cost of a Tronn server is $1570 and
with a markup markgin of 30% to the cost the price would be $2041 still the arrived price is more
than the price of the Zink server.
Therefore Atlantic bundle may not consider cost-plus pricing for its product to get the customer's
acceptance. The rate of return would be too less and the pricing option would give only a short-term
benefit.

Method 4 - Value in use pricing

Value in use pricing refers to the value of the product in terms of expected financial impact or
solution to the customer
Customers value or product or service in terms of its cost benefits, the technology used, durability
long-term application and other social and economic benefits of the product.
Market research on the value of the product in terms of cost saving and other benefits over a
competitor’s brand should be made as a unique selling point of Tronn Server. Atlantic should target a
market that does web hosting and file sharing. These companies can achieve maximum benefits by
using PESA software.
As the other pricing strategies would offer only short-term benefits to Atlantic Bundle. Value in use
pricing is the best method to be used for the high-performance Tronn server with the PESA software
tool to position its product to gain a long-term advantage and to create a good brand image.

2. Anticipate the reactions to your recommendation and formulate plans to address them, for the
following individuals/groups: (a) Matzer (b) Cadena & salesforce (c) Sr. Management at Atlantic (d)
Customers (e) competition (Ontario Zink’s Sr. Management)

a) Matzer, Hear of Server Division: There can be two reactions from Matzer on the pricing
strategy we have deduced:
i. The first reaction would be the price is too high. The requirement of
maintaining the consumer perception of the best quality product. With the
name Atlantic computer which has a big server market, it will be easier for
the users to perceive the high performance of Atlantic Bundle.
ii. The other reaction would be that the price is too low. This is required to
penetrate the already captured basic market.
b) For Cadena and salesforce, their reaction would be the prices are high, and the sales force can
earn more commission at this rate as compared to a lower rate. However, the sales force needs
to be trained to highlight and let the target consumer understand the additional benefits that
can be achieved using this product.
c) Sr. Management at Atlantic: High revenue can be achieved by using a more aggressive
pricing and marketing strategy, but this may not help in capturing the market share which is
targeted over the next 3 years.
d) Customers: For them, since the prices are competitive and added long term and short-term
advantages of the product are highlighted, will be beneficial for them.
e) Competition: The price of existing products can be further reduced in reaction from the
competition. By competing in their price range, this is easily achievable. Since Ontario's
business strategy is built on operational excellence, it is safe to predict that Ontario won't
actually develop new products to counter Atlantic's innovation.

3. Compare the top line revenue implications of alternative pricing strategies to the firm over the next
three years

Status Quo pricing:

The cost of the Server is $2000

2 Tronn + PESA software free = 2*2000=$4000
Per Atlantic Bundle $2000

Competition-based pricing:

Since the price of 2 Tronn servers with PESA software is equivalent to 4 Zink servers.
Price of Zink server=$1700
2 Tronn server + PESA software free= 4*1700=$6800
Price per Atlantic Bundle=$3400

Cost-plus pricing:

Cost of the PESA software development = $2000000

Cost of Tronn Server = $1538
 Market 2001 2002 2003 Total
Volume (in
units)
Market 50000 70000 92000
Volume of
Basic Server
Atlantic Share 4 9 14
( in %)
Estimated 2000 6300 12880 21180
Total Sale of
Tronn Server
Estimated 1000 3250 6440 10590
Total Sale of
PESA
software
(50% of
Tronn Server
Sales)
Price per 30% Markup Total ($)
server: ($)
PESA Cost 188.8 56.65 245.51
per server

Cost per Tron 1999.4

Total price of Atlantic Bundle = $2245

Value use pricing:

Cost per Atlantic Bundle $4200

Status Quo Competition Value use

pricing Based pricing Cost Plus pricing pricing
Estimated Number of Units over 3
years 21180 21180 21180 21180
Price Per Atlantic Bundle ($) 2000 3400 2245 4200
Total Revenue from Sales ($) 42360000 72012000 47549100 88956000
Variable Cost per unit ($) 1538 1538 1538 1538
Total Variable Cost ($) 32574840 32574840 32574840 32574840
Fixed Cost for development of
PESA ($) 2000000 2000000 2000000 2000000
Total Cost (in $) 34574840 34574840 34574840 34574840
Profit (in $) 7785160 37437160 12974260 54381160

We can see that revenue calculation for different pricing strategies that profits earned are higher for
value use pricing.