Case Analysis - Atlantic Computers

ATLANTIC COMPUTER A BUNBDLE OF PRICING OPTIONS

By Kanishka Poddar (220)

Case Analysis 

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 Radia servers being their premier product. However, the market for Basic servers is growing and this has caused Atlantic Computers to develop and introduce a Basic Server called the Tronn and a software tool called the “Performance Enhancing Server Accelerator” (PESA).



The Tronn was developed mainly for the emerging US market opportunity for basic servers. The PESA would allow the Tronn to perform up to four times faster than its standard speed and make frequently requested information more accessible. Thus, bundling the Tronn and PESA made more sense.



Atlantic is not concerned that the Tronn will be considered a substitute for its High Performance servers.

Problem Area 

What pricing strategy should Atlantic Computers implement to price the Atlantic Bundle?

Pricing Strategy 

There are four main types of pricing strategies which Atlantic Computers can choose.



First, Atlantic Computers could stay with the status quo and offer software tools for free. Second, it could choose competitive based pricing. Third it could choose from Cost-plus pricing. Finally, it could choose value-in use pricing.

  

Status Quo Pricing 

This option consider only the cost of server and treats PESA software as free product along with servers: Price of 1 Tronn Server:

$2000

2 Tronn Servers + PESA Software (Free) ($2000 x 2) Price of Atlantic Bundle =

$4000

$4000

Competition Based Pricing 



Pricing the Tronn servers based on price of competitor server (Zink by Ontario) and PESA for free. Since 2 Tronn Server with PESA software is equivalent to 4 Zink servers: Price of 1 Zink Server 2 Tronn Server + PESA Software (4 x $1700) Price of Atlantic Bundle =

$1700 $6800 $6800

Cost Plus Pricing Market volume (in units) Market Volume of Basic Server Atlantic Share ( in %) Estimated Total Sale of Tronn Server Estimated Total Sale of PESA software (50% of Tronn Server Sales)

2001

2002

2003

50000

70000

92000

4

9

14

2000

6300

12880

21180

1000

3150

6440

10590

Cost of Tronn Software PESA Software Development Cost

Total

$1538 $2,000,000

Cost Plus Pricing Price per server:

Cost

30% Markup ($)

Total ($)

PESA Cost per server

188.9

56.658

245.52

Cost per Tronn server

1538

461.4

1999.4

Pesa Cost per Server

= = =

Total Cost involved/ Total Estimated Sales 2000000/10590 $188.9

After the Markup 30%, as calculated in the above table: Cost of Atlantic Bundle

=

$2245

Value-in use Pricing 

Considering 4 Zink server is equivalent to 2 Tronn server + 2 PESA software Cost Savings

Amount ($)

Saving in Electricity

500

Software Licenses

1500

Labour

4000

Cost of Server

2800

Total

8800

As per value pricing model of 50-50% Price of PESA

4400

2 Tronn + 2 PESA

8400

Cost of Atlantic Bundle

4200

Comparison: Projected Revenue and Profit for 3 Years Particulars Estimated Number of Units over 3 years Price Per Atlantic Bundle ($) Total Revenue from Sales ($) Variable Cost per unit ($) Total Variable Cost ($) Fixed Cost for development of PESA ($) Total Cost (in $) Profit (in $)

Status Quo

Competition Based

Cost Plus Approach

Value in use

21180

21180

21180

21180

2000

3400

2245

4200

42360000

72012000

47549100

88956000

1538

1538

1538

1538

32574840

32574840

32574840

32574840

2000000

2000000

2000000

2000000

34574840

34574840

34574840

34574840

7785160

37437160

12974260

54381160

Conclusion On detailed comparative study of 4 different pricing approch for Tronn Servers & PESA Softwares, it is eveident from the above chart that Competition Based pricing is the most suitable option.  



 

This approach takes into consideration competitors prices and provides superior services at same rate. The market share is already owned by competition to an extent of 50%, hence price plays a vital role. It needs to highly competitive and at par with the pricing of competitive products. Low price does not always means that product will bhe accepted by the market. If the prices are very low, the market even presumes that the quality of product if inferior. If the pricing are very low, competitors can also reduce there prices to that extent as there product already command certain share in the market. If prices are too high as given in Value in Use Pricing, then consumer may not accept the product and would prefer to buy two products of competition in place of one Tronn Servers.