ATLANTIC COMPUTERS

A BUNDLE OF PROCONG OPTIONS

HOW CAN JASON JOWERS PROCEED WITH PRICING

APPROACH FOR THE NEWLY DEVELOPED SERVER AT
ATLANTIC COMPUTERS?

BY WORKING GROUP AC2

ABHIRAMI ANIL KUMAR
AKASH TRIPATHI
PALAK RAJPUT
SANJAY DADWANI
SATYAJIT SAHOO
CASE FACTS
1. Jason Jowers has recently taken on the role of new product manager at Atlantic Computer, a
prominent manufacturer of high-tech products, including servers.
2. Jason's primary responsibility is to formulate a pricing strategy for a package known as the
"Atlantic Bundle." This package comprises the Tronn Server along with the PESA software tool.
3. Atlantic Computer is widely acknowledged as a major player within the overall computer
industry.
4. In terms of the High-Performance Servers market segment, Atlantic Computer holds a 20%
market share.
5. Ontario Computer Inc., a company focused on the low-end server market and renowned for its
Zink product line, currently commands a significant 50% share of the revenue market within the
basic server market.
6. Historically, Atlantic Computer has provided its software free of charge. However, the PESA
software is unique in that it enables customers to purchase fewer servers while also reducing
operating costs, including those related to electricity, labor, and software licensing fees.
7. Atlantic Computer boasts nearly three decades of experience in the computer industry.
8. Matzer, associated with Atlantic Computer, believes that customers do not consider high
performance servers and basic servers to be interchangeable.
9. The Compound Annual Growth Rate (CAGR) for the basic servers segment is approximately
36% over a three-year period leading up to 2003.
10. PESA significantly enhances the operational speed of the Tronn server, increasing it by
fourfold compared to its normal speed.
11. Atlantic Computer holds a leadership position in the traditional market with its flagship
product Radia, which is recognized as a premium offering.
12. The sales force compensation structure entails around 70% fixed salary and 30%
commission.
Problem Summary

A. Challenges Presented
1) Atlantic Computers is currently grappling with the decision of choosing the
optimal pricing strategy for the upcoming launch of Tronn server bundles
accompanied by the PESA software tool. The pricing strategies under
consideration are:
(i) Status Quo Pricing
(ii) Competition-Based Pricing
(iii) Cost-Plus Pricing
(iv) Value-in-Use Pricing

2) The company is seeking a strategy to effectively guide their sales force, which
has traditionally focused on hardware sales, in promoting and selling the PESA
software tool alongside the hardware, now at an additional cost.

3) Atlantic Computers is also contemplating the potential response from Ontario

Computer Inc. when the Atlantic Bundle is introduced and is devising plans on
how to manage any reactions.

B. Immediate and Long-term Objectives

- In the short term, Atlantic Computer's primary objective is to successfully
introduce the Tronn servers into the basic servers segment despite facing stiff
competition. The aim is to gain a foothold in this market segment.
- Over the long term, the company is committed to expanding its product portfolio
to encompass all segments of the market.
C. Decision Predicament
Atlantic Computers find themselves at a crossroads concerning the choice of the
most suitable pricing strategy. The decision-making process is complicated by
potential challenges such as reduced profitability, possible counteractions from
dominant market players, and potential customer resistance based on the selected
pricing approach. Navigating these challenges while striving to achieve both short-
term and long-term goals presents a complex decision-making dilemma for the
company.

Causes of the Problem

The various causes for the problem are:
• Growth of Internet and the proliferation of applications in the late 1990s created a
shift in the paradigm of usage of servers across customer segments
• Large growth opportunities (CAGR approximately 36%) in the basic server
category
posed a threat as well as opportunity for Atlantic Computers
• Stagnant growth in the high-performance server category (CAGR of 3%) was a
hint.
for Atlantic Computers to extend their product line
• The report from 1999 written by Matzer , a 20-year veteran of the computer
industry,
suggested that high performance servers and basic servers would not be viewed as
substitutes by customers.
• As far as pricing strategy is concerned, Tronn servers would be competing with
the
market leader and a minor error in pricing would create huge repercussions.

Decision Criteria and Available Options

• Criteria for Decision-Making

Atlantic Computer will base its decision on the following criteria: achieving
breakeven while managing competitor responses, attaining a substantial market
share, and generating profits. Assessment of Pricing Strategy Alternatives:
In alignment with Jason Jowers' conservative approach, all calculations are
performed by comparing configurations of 2 basic servers with the PESA software
tool versus 4 basic servers:

1) Status Quo Pricing:

This approach involves maintaining the tradition of charging solely for hardware
while providing the PESA software tool at no extra cost.
PRICE PER SERVERS $ 2000
NUMBER OF SERVERS 2
TOTAL COST $ 4000

But if the company follows this strategy, it will have to forego the R&D investments of
$20,00,000 done in PESA software tool.

2) Competition-based Pricing: This strategy includes charging a price equal to

what consumer would pay for four Ontario Zink servers.

TRONN ZINK
PRICE PER SERVERS $ 2000 $ 1700
NUMBER OF 2 4
SERVERS
TOTAL COST $ 4000 $ 6800
Hence, under this method, the price charged for 2 servers will be $6,800.

3) Cost-Plus Pricing: In this strategy, the price is set based on a cost-plus

approach for pricing the PESA software tool. Certain assumptions are considered:
- Atlantic is projected to achieve a portion of the basic server segment, with a
share of 4% in 2001, 9% in 2002, and 14% in 2003.
2001- 4% *50,000 = 2,000 units
2002- 9% * 70,000 = 6,300 units
2003- 14% * 92,000 = 12,880 units
Total of all the years = 21,180 units
ii) Attach Rate of 50% (meaning half of all basic servers sold will include the
PESA software).
iii) The software development costs for PESA by Atlantic ($2,000,000) will be
distributed over a span of three years.
iv) An intended mark-up of 30% over costs is aimed for.
ESTIMATED TRONN SERVER $ 21,180
SALES
Equipped with PESA (50% of $10,590
21,880)
PESA SOFTWARE R & D COST $20,00,000
PESA INSTALLATION COST PER $188.86
UNIT
COST OF TRONN $1,538
TOTAL COST OF ATLANTIC $1,726.86
BUNDLES
MARK UP 30 % $518.06
TOTAL BUNDLE PRICES $2,245
(APPROX)

Hence, for two servers, the bundle price is 2,245*2 = $4,490

4) Value-in-Use Pricing: This pricing approach involves establishing prices that

aim to capture a portion of the customer's potential savings from purchasing the
company's product. In this case, a sharing arrangement of 50-50 for the realized
savings with the customer is assumed.

2 TRONN SERVERS 4 ZINK SERVERS

PRICE OF SERVERS $4,000 $6,800
ELECTRICITY COSTS $500 $1,000
($250/SERVER)
LICENSING COST $1,500 $3,000
($750/SERVER)
TOTAL COST $6,000 $10,800
 SAVINGS BY TRONN 10,800 – 6000 =$ 4,800
50% TRONN SAVINGS $ 2,400
FINAL COST OF BUNDLES 4,000 + 2,400 = 6,400

Pricing Strategy Options:

1. Option 1: Status Quo Pricing
In this scenario, Atlantic offers the PESA software tool for free. However, this
choice would result in a loss of the $2,000,000 spent on research and development.
Additionally, it might lead to Tronn being perceived as similar to Zink. Thus, this
alternative seems unfavorable.

2. Option 2: Competition-Based Pricing

While this strategy generates the highest profits for Atlantic, it might not be
advisable. The pricing exceeds that of competitors, potentially deterring customers
from purchasing the bundle.

3. Option 3: Cost-Plus Pricing

This approach might also prove ineffective, as customers could perceive the
value of two Tronn servers at $4,490 compared to the Zink server priced at $3,400
– a difference of $1,092 more than the Zink servers.

4. Option 4: Value-in-Use Pricing

Under this model, the bundle would be priced at $6,400. Customers would save
$4,800 by purchasing two Atlantic bundles instead of four Zink servers. This
visible savings could encourage customers to opt for Atlantic bundles, making this
the most favorable model for Atlantic Computer to adopt when pricing the
"Atlantic Bundle."
WE ARE GOING WITH ALTERNATIVE 4 (VALUE IN
PRICING)

Reasoning:
• More value through monetary benefits
• Price conflict is not a healthy option as Tronn
itself is $1538 while Ontario sells the zinc at
$1700. also, Atlantic has to bear the cost of PESA
in case Ontario lower the Price it will be
cumbersome for Atlantic to Survive.
• If Revenue increase profit will also increase.