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ATLANTIC COMPUTER: A BUNDLE OF PRICING OPTIONS
- 1. By- Akshay Kumar Jain
- 2. In this case, Atlantic Computer is a manufacturer of servers and high-tech products. Two market segments exist in the server industry: High performance and Basic Servers. Atlantic Computers has held a 20% share of the High Performance market with their Radiaservers being their premier product. However, the market for Basic servers is growing andthis has caused Atlantic Computers to develop and introduce a Basic Server called the Tronnand a software tool called the “Performance Enhancing Server Accelerator” (PESA).
- 3. • Atlantic Computer is a manufacturer of servers and high-tech products. • Currently there 2 market segments: Traditional and Basic server markets. • Atlantic is a market leader in traditional market with its product Radia, which is a premier product. • Basic market is a new market and is a fast growing one. • For basic market, Atlantic has developed a server Tronn. Also Atlantic has developed a software tool PESA, Performance Enhancing Server Accelerator
- 4. • PESA enhances the Tronn server’s speed by 4 times from its normal speed. • Atlantic’s main competitor in basic market segment is Ontario, which commands 50% market share with its product Zinc.
- 5. • The pricing strategy for the Atlantic bundle, which is Tronn server with PESA tool, need to be determined. • There are 4 options available. 1. Atlantic Computers can stay with the status quo and provide PESA as free with Tronn server. 2. 2. It can choose competitive based pricing, which is charging customer to 4 times Ontario Zinc servers. 3. 3. Arrive at price by cost-plus pricing. 4. 4. Arrive at price based on value-in use pricing. 5. • Also other questions regarding product’s target market, competitor’s and customer’s reaction need to be answered.
- 6. The industry norm for pricing a server and software bundle is to merely include any Neeraj Bharadwaj, John Gordon, “Atlantic Computers: A Bundle of Pricing Options”, 2007, 2 Id. software tools with the hardware. Atlantic Computers has always practiced this pricingstrategy. 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.
- 7. Competition-Based pricing uses the prices of competitors as a benchmark for pricing products rather than considering costs. The price of Ontario’s Zink servers is $1700 and conservatively speaking, the Tronn loaded with the PESA software tool is equivalent to two of Ontario’s Zink servers. 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.
- 8. . 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 $2,246 which is $546 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
- 9. • Though the most profitable option looks to be option2(competition-based pricing), we recommend Atlantic to go for option 4(value-in pricing).• Reasons to opt for value-in pricing are listed below. 1. Atlantic computer can show more value to customers by showing them the monetary benefits. 2. If sales increase then Atlantic will also gain by 50-50 profit sharing. 2. 3. Also opting for price-war may not be an good option for Atlantic because the cost of Tronn itself is $1538 while Ontario sells the Zinc at $1700. Atlantic need to factor the cost of PESA as well. So if Ontario lowers the price then it will be difficult for Atlantic to survive.
- 10. • Though the value-in pricing looks to be most beneficial to both customers and Atlantic, there are certain challenges. – Salespeople need to be convinced about this because their 30% of pay comes from sales and value-in pricing is lower priced than other parts. – Sales people need to be trained to describe the value to customers properly. Pricing Method Expected Sale Revenues($) Costs Profit Status-Quo 21,180 $18,287,420 $2,416,030 $2,416,030 Comp-Based 21,180 $36,006,000 $18,287,420 $17,242,030 Cost-Plus 21,180 $23,785,140 $18,287,420 $5,021,170 Value-In 21,180 $33,888,000 $18,287,420 $15,124,030