ATLANTIC COMPUTER: A BUNDLE OF PRICING OPTIONSSummary of the Situation Analysis In this case, Atlantic Computer is a manufacturer of servers and high-tech products.1 Two market segments exist in the server industry: High performance and Basic Servers.2 Atlantic Computers has held a 20% share of the High Performance market with their Radia servers being their premier product.3 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).4 The Tronn was developed mainly for the emerging US market opportunity for basic servers.5 The PESA would allow the Tronn to perform up to four times faster than its standard speed and make frequently requested information more accessible.6 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.7 Primary Question to be addressed: What pricing strategy should Atlantic Computers implement to price the Atlantic Bundle? Analysis There are four main types of pricing strategies from 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. In addition to determining which pricing strategy to use, Atlantic Computers must also determine which businesses are most likely to benefit from the Atlantic Bundle. Next, Atlantic Computers will have to consider how customers are likely to react to the Atlantic Bundle. Finally, Atlantic Computers will also have to consider how competitors will respond to the recommended pricing strategy. . 1. Status Quo Pricing: The industry norm for pricing a server and software bundle is to merely include any 1 2 3 4 5 6 7 Neeraj Bharadwaj, John Gordon, “Atlantic Computers: A Bundle of Pricing Options”, 2007, 2 Id. indirect and fixed costs associated with a product and converting it into a per-unit cost for the product. the price of a Tronn loaded with PESA would be $2.700 each. 11 Id 12 Id 13 Id 14 Zink servers are priced at $1. It would be difficult for Atlantic to 8 9 Neeraj Bharadwaj. “Atlantic Computers: A Bundle of Pricing Options”. 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. Therefore. Atlantic Computers has always practiced this pricing strategy. While selling at this price would generate more profits for Atlantic Computers. .com/definition/competition-based-pricing. 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. John Gordon. the Tronn loaded with the PESA software tool is equivalent to two of Ontario’s Zink servers. Adding 30% to the cost of PESA would make the price $189.000. http://www. While the addition of the PESA software tool would make the Tronn servers the equivalent of 4 Zink servers. the PESA software does not work on all software applications. it would cost $4.10 Therefore. As the chart below details.000 price.800 for the Zink servers. under the Competition-Based Pricing.14 Again.software tools with the hardware. it is not certain that consumers would purchase the “Atlantic Bundle” at this price.businessdictionary. Cost-Plus Pricing: Cost-plus pricing is determined by adding the direct.246 which is $546 above the Zink server. Additionally.492 as compared to $6.11 Furthermore. 3.8 This would require Atlantic Computers to offer the PESA software tool for free with the Tronn Server. this additional markup is approximately 30% .000 cost of research and development of PESA.538 and based on a $2. Consumers would see that they are only getting two Tronn server that costs 4 times the cost of the Zink server.12 A predetermined percentage is then added to these costs to provide a profit margin. 2. John Gordon. “Atlantic Computers: A Bundle of Pricing Options”.13 The cost of a Tronn server is $1. 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. This would require Atlantic Computers to essentially lose the $2. under the cost-plus method. the cost of the “Atlantic Bundle” would be $1700 x 2 or $3400.9 The price of Ontario’s Zink servers is $1700 and conservatively speaking. Because we are looking at this conservatively. we will assume that two Tronn servers are the equivalent of four Zink servers. Competition-Based Pricing: Competition-Based pricing uses the prices of competitors as a benchmark for pricing products rather than considering costs.html 10 Neeraj Bharadwaj. Cost-Plus Pricing Total Number of Tronn servers sold in 3 years Total installations of PESA assuming 50% attach rate Cost of PESA per installation ($2.18 After a 50-50 share. social.persuade customers to purchase the servers based on the Cost-Plus pricing because customers would still only see that they are getting two servers for $4. of the technical.17 As the chart below illustrates. the customer value would be the annual cost of electricity and software licensing for each server.180 10.000 $10. James A. customers are not likely to accept this additional cost.” This would help demonstrate in monetary terms the customer’s true value of buying the “Atlantic Bundle. Anderson.800 Total Final Customer Price (Total Price + 50-50 sharing) $6.500 per server.500 $3.16 It would then calculate the difference between the two figures and assume a 50-50 share of savings. James C.800 Savings (Difference between Zink and Tronn) $4. and economic benefits a customer receives in exchange for the price it pays for a product. Value-in-use Pricing: Using the Value-in-use pricing method. when the total costs are added.. Mar2006.15 In this case. .000. Narus.492 4.400 when they buy two “Atlantic Bundles. Customer value can be defined as the worth.” Value-in-use Pricing Tronn x 2 Zink x 4 Price of Server $4. Vol.400 and that is $1. service. Atlantic Computers would determine the value that each customer would realize from the purchase of the product. Without further justification.000/10590) Price of Tronn without PESA installed (Cost + 30% markup) Price of Tronn with PESA installed (Cost + 30% markup) Price of 2 Tronn servers loaded with PESA 21.800 savings when using two Atlantic Bundles as compared to four Zink servers.400 Value-in-use pricing is the best method: 15 . regardless of quantity. p90-99 16 17 18 This assumes a $250 annual cost for Electricity per server and annual license fee of $1. Under this method. in monetary terms. Customer Value Propositions in Business Markets.000 Total Price $6.590 $189 $2000 $2.246 $4.092 more expensive than Ontario’s Zink servers. Labor is not included because the cost is the same for both servers. Harvard Business Review.400.800 Electricity (Annual Cost) $500 $1. van Rossum.. 84 Issue 3. a customer would potentially realize a $4. the total final price would be $6.000 Software License $1.000 $6. Wouter. it is easy to show customers that they will be saving $2.492 whereas they could get two Zink servers for $3. Gordon. It is when the Tronn Server is acting as a web-server and coupled with PESA that the “Atlantic Bundle” is capable of realizing its true potential of being 4 times as fast as the basic server.20 . it is equivalent to four Zink servers. the Value-Based pricing method is the best to choose. Atlantic Computers will also need to emphasize that it will continue to provide excellent service after purchase and provide customers with peace of mind. this equates to a savings of $4. further adding to their profits. They will need to emphasize that not only are they saving on the number of servers they will need to purchase. As shown in Exhibit 1. 8 20 . It is unlikely that Ontario would be concerned at this time and would not take any steps to counter-act. 2007. but they will also save on other costs. How will Ontario’s top management likely respond? a.19 Additionally. 19 Neeraj Bharadwaj. Ontario’s reaction would be to lower prices in order to stop market loss. customers are likely to question Atlantic Computers’ reasoning for deviating from the tradition of providing performance enhancing/monitoring tools for free. Long Run After the first year.” The valuein-use pricing method allows Atlantic Computers to demonstrate to customers the true value of their product. Additionally. the “Atlantic Bundle” will only take approximately 4% of the market share of the basic share market.800 to a customer. Which market should be targeted? The target market for the “Atlantic Bundle” would be those companies that do a lot of web hosting. Atlantic Computer: A Bundle of Pricing Options. Conservatively looking at the numbers. Atlantic Computers will share in the savings of customers. the Competition Based pricing method will generate more profit per unit than any other method. the true value of the “Atlantic Bundle. Because the “Atlantic Bundle” is a basic server and software tool that allows it to operate at four times the speed. those companies who do a lot of file sharing would also benefit from the “Atlantic Bundle” as it would still enjoy an increase in performance equivalent to 2 basic servers.Of the four methods available for pricing the “Atlantic Bundle”. it will not allow Atlantic Computers to fully demonstrate. 1.” Atlantic Computers will have to demonstrate to customers that the PESA software tool essential doubles and possible quadruples the number of basic Tronn servers. in monetary terms. How are customers likely to respond? At first. 3. 2. Short run vs. At this moment. This may be one of the more difficult tasks associated with pricing the “Atlantic Bundle. It would take until at least the second year and likely the third year before Ontario would begin to take action. John B. 140 $18.180. Atlantic Computers will have recouped much of the research and development costs associated with PESA and can begin to include the software as part of the Tronn Server at no charge. Training the salespeople to show customers exactly the value they will be getting will help the salespeople understand that they will essentially be able to sell more servers at a higher cost.420 $15.000 $18.287.170 $474 $33.420 $2.416. Exhibit 1 Pricing Method Status Quo Competition-Based Pricing Cost-Plus Value-in-Use Revenue Costs Total Profits Profit/Unit $21. At this time. After years of providing software tools for free with servers.287. 4.287.628 $23. it will take some persuading to get veteran salespeople on board with the value-in-use pricing method.888.428 21 . thereby making more money off of commission.124.785.Of course.006.287. Ontario will likely begin to copy the PESA software and begin to include it in their Zink server packages.021. This is especially true because the salespeople derive 30% of their pay off of commission.000 $18.000 $18.420 $5.420 $17. Other problems associated with using Value-in-use pricing.030 $1.242. Ontario will only be able to lower prices for a short period of time before such actions begin to drastically decrease their profits.030 $1.21 They know that they will sale more volume if they are able to lower the price.030 $228 $36.