Atlantic Computers: A Bundle of Pricing Options

Atlantic Computers: A Bundle of Pricing Options

Introduction
Atlantic Computers Inc has been the largest player in the overall Computers industry. They
have been well established, competing in the server market for the past 30 years. Their most
known product is “Radia”, a high-end performance server sold to large enterprise customers. The
company has maintained a reputation among everyone with their products for the
following reasons:
1. Top-Notch highly reliable products
2. Responsive post sales assistance
3. High Quality

Segments in the Market:
There are two main segments in the server industry:

1. High performance Servers
2. Basic Servers
The segment of High-performance Servers is the largest. It basically represents the traditional use
of severs to run complex application. An annual growth of 3% percent is expected from this
segment in the next two years. Also, the demand from this segment for next year is expected to be
200,000 units. The segment for basic servers is a relatively new segment. However, with the
emerging growth of internet this segment seems to be growing alongside. The expected annual
growth rate for this segment is about 36% through 2003.
Competitors:
The Ontario Computer Inc is one of the major competitors of the Atlantic Computer Inc.
The Ontario Computer Inc mainly focuses on the low-end server market. They have claimed 50%
revenue market share in the basic server market, with its Zink Product Line. The below reasons
give Ontario Computer Inc an upper hand in this segment:
1. Majority of the sales generated online

2. Business model based on operational excellence
3. Ability to drive out many non-value-added costs has made them compete on price

Protagonist:
Jason Jowers is a product manager and responsible for pricing strategy of the product. He has a

MBA degree and is freshly recruited (joined 4 months back) by Atlantic Computers.

Problem Statement:
Jason Jowers has a strong task in his hands now as to decide the pricing strategy for the Atlantic
Bundle which consists of the new Tronn server and the PESA software tool. He is confident and
eager for this challenge.
1) What pricing options and final price should Jowers charge DayTraderJournal.com for
the Atlantic bundle (i.e. Tronn Servers + PESA Software tool)?

The recommended price for this product is $ 4200 but we chose $ 4199 instead, because of the
Odd-Even prices. As the customer would feel that the price is lower than it really is.
The price-based strategy has been used because it is consumer based. Checks all costs that the
customer will enter during the life of the product, and check the value of the product in it
customer. The total cost to Zink's competitors is $ 8,800 more than Tronn. And the customer will
save so much money, in the long run it is a reason to charge PESA software.
This pricing strategy contradicts the Atlantic tradition of providing software tools to their free
customer service, the software tool causes Tronn's computer to operate four times faster than the
normal operating speed. We chose to charge for extra speed and convenience because we would
like to indicate the highest level of server market. Hence, you can enter the market at a higher
price, because people are willing to pay for quality. Below table shows the calculation.

2) How much money would be left on the table if the firm were to give away the software
for free?
Jason Jowers was assigned the task of developing a pricing structure for the trade show by Matzer.
He had four choices :
A. To stick to the company tradition by charging only for hardware (Tronn) and give the
software PESA (Performance Enhancing Server Accelerator) away for free.
B. Charge a price equal to what a customer would pay for four Ontario Zink servers. Ontario
was a direct competitor to Atlantic Computers
C. Include the cost of developing PESA into the selling price of the server
D. Charge by value i.e. Money saved by reducing expenditure of clients of Atlantic
Computers
If Atlantic were to give away the software for free then,

Revenue earned by selling 21180 units in 3 years combined = 21180*2000 = $42,360,000
Cost of application software (to be borne by Atlantic) = 21180*1538 = $32,574,840
Total fixed cost (cost of developing software) = $2,000,000
So, total cost (Cost of application software + Total fixed cost ) = $34,574,840
Profit = Revenue – Total fixed cost = $7,785,160

3) What can Jowers recommend getting the salesforce to understand and sell the value of
PESA software effectively?
The earlier company policy to provide software to the clients coupled with hardware was a
general practice in the company. However, the “Performance Enhancing Server Accelerator”
(PESA) should be treated as an exception.
As Tronn was developed mainly for the emerging US market for basic servers, hence bundling
the Tronn and PESA made more sense because PESA would allow Tronn to perform 4 times
faster hence making the daily operations smoother. This would help in competing
against Ontario which had 50% of the revenue market. The salesforce would be encouraged and
train to educate customers about the savings they would be gaining from utilizing lesser number
of servers, lesser manpower & electricity as well as reduced software
licenses. Accommodating all the savings will help the company to gain market share from
Ontario. Hence, our recommendations to go ahead with Option 4: Charge by Value. The included
software price will increase the list price of the product hence the sales force commission structure
would help them in getting the commission. There should be inclusive cohesion in the company
which will help company in pushing the product in one direction.

4) How is Ontario’s Zink’s senior management team likely to react to the Atlantic bundle?
Ontario is a well established and price competitive company as compared to Atlantic Computers.

The introduction of Atlantic Bundle will surely affect them. This may or may not be visible for a
short term but in a long term, this can be very problematic for Ontario and its market share. As
Atlantic bundle is introduced, one of the options for Ontario’s Zink’s senior management team
will be to drive their prices down so that they can still have their capture on mid to lower level of
the Basic Server industry. The second option would be to start working on the research of new
software tools to rival PESA. The research and development of a new technology will certainly
take some time and cannot be done immediately. If they lower the price, they may not make
enough profit to continue and their market share will be threatened. Either ways, it is profitable
for Atlantic Computers to introduce Atlantic Bundle.
Recommendation
Jowers had 4 ways of developing a pricing strategy. All the 4 options have been discussed above.
The 4th option, i.e., Charge by value, was to charge clients by splitting the money saved, into two
equals halves. The 4th option will help Atlantic Computers to gain easy market share and earn
profits too. This option would require Atlantic Computers to go against tradition and charge for
the software PESA along with Tronn. They should charge higher because this is a quality product
developed by Atlantic and hence willing customers will pay the high charges. The customer
would also be saving over the longer term.
Another benefit would be that the value-based pricing strategy will appeal to most customers
because it is customer centric and Atlantic Computers will only profit if it helps the customer to
reduce expenses. This strategy could also force Ontario to reduce their prices in order to keep their
tight hold on mid to lower segment of server industry. Ultimately by introducing Atlantic Bundle
with Value in Charge pricing, Atlantic Computers will benefit and the competition will also be
threatened.

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Atlantic Computers: A Bundle of Pricing Options

There are two main segments in the server industry:

1. Majority of the sales generated online

Jason Jowers is a product manager and responsible for pricing strategy of the product. He has a

If Atlantic were to give away the software for free then,

Ontario is a well established and price competitive company as compared to Atlantic Computers.

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