Marketing Management

Case Analysis

Atlantic Computer: A Bundle of

Pricing Options

A Submission By:
Team AC2

PROBLEM STATEMENT
In what ways can Jason Jowers strategize the pricing for Atlantic bundle comprising of the new Tronn server and the
PESA (Performance Enhancing Server Accelerator) software tool before SME trade show?
COMPANY OVERVIEW
Atlantic Computers was a manufacturer of servers and related high-tech products based in Amberville, New York. Jason
Jowers joined the Company four months ago and was made responsible for the pricing strategy of the product Atlantic
Bundle
Components of the Bundle:
1) Tronn: It was developed mainly for the emerging US market opportunity for basic web servers
2) Performance Enhancing Server Accelerator (PESA): This was an additional tool which would allow Tronn to
perform four times faster than its usual speed for standard procedures and hence the bundling made sense by
making frequently requested information extremely accessible.
Atlantic Computer & the Market
The company targeted two market segments vis--vis High Performance and Basic Servers. Atlantic had 20% market share
in High Performance Servers with Radia being its premier product for over 30 years. There was an indication of emerging
market for basic servers coming up in the late 1990s which led to the introduction of the Basic server into the market by
Atlantic Computer by 2000 with a view that there will not be any cannibalization of their high performance product taking
place due to the new venture. The major competition for the company in the now market segment of basic server was that
from its competitor Ontario which had a 50% market share in this business with its flagship brand Zink Business model
based on operational excellence and hence was able to curtail many non value-added costs to pose a very competitive
pricing for their product.
Server Type

Segment
size

Projected
demand (1st yr)

Projected demand
(next 2yrs)

Atlantic
Market share

High performance
servers

Largest

200,000 units

3% annually

20%

50,000 units

36% CAGR

Basic Servers

Ontario
Market Share

Zink 50%

VALUE PROPOSITIONS OF THE ATLANTIC BUNDLE

PESA Tronn with PESA would increase the speed by 4 times

Fewer servers required primary objective of the customer
Lower second order savings effect
o Lower annual electricity charges
o Less software licensing fee
o Less labor cost

CUSTOMERS
Atlantic Internal Performance Testing Results (July 22, 2000)
Tronn with PESA

Tronn without
PESA

Added Advantage in %

180

187

-3.89%

280
341

281
300

-0.36%
12.02%

File Sharing

812

404

50.25%

Web Servers

2222

542

75.61%

Application Tested
High Performance/ Compute Intensive
Workloads
Graphics Application
E-mail Applications

After analysing the table above, we can get the below customer findings:
Web Server Basic Server Customer
These customer get the highest advantage from the PESA tool in Tronn. Hence should be targeted.
File Sharing Basic Server Customer
As computing power without PESA was same as the competitors, pricing will have to be considered in this case. PESA
was not giving any added advantage for the graphical application
Heavy computing Application Customer
Same as the case above, PESA was not giving any added advantage in heavy computing technology. Hence pricing needs
to be considered wisely in this case as well
ALTERNATIVES AT HAND
There are 4 alternative available for strategizing pricing:
1.
2.
3.
4.

Stay with the status quo and provide PESA as free with Tronn server
Choose competitive based pricing, which is charging customer to 4 times Ontario Zinc servers
Arrive at price by mark up (cost-plus) pricing
Arrive at price based on perceive value (or value in) pricing

Apart from these, other questions regarding products target market, competitors and customers reaction also needs to be
figured out.

ASSESSING THE ALTERNATIVES

Option 1: Stick With Companys Tradition And Charge Only For Hardware

SP of Atlantic Bundle = $2000(Price of a basic server)

R&D cost = $2000000
Cost per unit = $1538(SP= 2000 with 30 % mark up on cost)
Profit per unit = $462
Atlantic Computers has to sell 4330 units to Breakeven
Year
Price of Tronn
PESA
SP
of
Atlantic
Bundle
Market Share
Sales Volume(20%)
Sales Revenue
Total Server Cost

2001

2002

2003

$
$

2,000.00
-

$
$

2,000.00
-

$
$

2,000.00
-

2,000.00

2,000.00

2,000.00

50,000
2000
$ 4,000,000.00
$ 3,076,000.00
$ 924,000.00

68,000
6120
$ 12,240,000.00
$ 9,412,560.00
$ 2,827,440.00

Net Income
Note:
1. The R&D cost would be a sunk cost if this option is chosen
2. The costing doesnt include all associated costs of the server

92,480
12,945
$ 25,890,000.00
$ 19,912,794.00
$ 5,977,206.00

Option 2: Competition Based Pricing

SP of Atlantic Bundle = $2000 + 245 (Price of a basic server + PESA)
R&D cost = $2000000
Cost per unit = $1538
Profit per unit = $462
Atlantic Computers has to sell 2829 units to Breakeven
Year
Price of Tron
PESA

2001

2002
$2,000.00
$245.00

2003
$2,000.00
$245.00

$2,000.00
$245.00

SP of Atlantic Bundle
Market Share
Sales Volume(20%)
Sales Revenue
Total Server Cost

$2,245.00
50,000
2,000
$4,489,829.00
$3,076,000.00

$2,245.00
68,000
6120
$13,738,878.00
$9,412,560.00

$2,245.00
92,480
12,945
$29,065,359.00
$19,912,794.00

2002

2003

Note:
1. Better Costing compared to Option 1
2. Factors the cost of software development
Option 3: Cost Plus Approach
SP of Atlantic Bundle = $6800
R&D cost = $2000000
Cost per unit = $1538
Profit per unit = $5262
Atlantic Computers has to sell 381 units to Breakeven:
Year
SP of Atlantic Bundle
Market Share
Sales Volume(20%)
Sales Revenue
Total Server Cost
Net Income

2001
$
6,800.00
50,000
2,000
$13,600,000.00
$ 3,076,000.00
$10,524,000.00

6,800.00
68,000
6,120
$ 41,616,000.00
$ 9,412,560.00
$ 32,203,440.00

6,800.00
92,480
12,945
$ 88,040,960.00
$ 19,912,794.00
$ 68,128,166.00

Note:
1. Delivers value in cost savings associated with having one server in place of four
2. High priced option
3. Customers could expect a discount owing to reduced material cost for the vendor
Option 4: Value-In-Use Pricing
SP of Atlantic Bundle = $4200 (2000(traditional price) +50% of [Electric (500) + Admin (4000) + Software (1500) + Server
savings (3400)])
R&D cost = $2000000
Cost per unit = $1538
Profit per unit = $2662
Atlantic Computers has to sell 752 units to Breakeven
Year
SP of Atlantic Bundle
Market Share
Sales Volume(20%)
Sales Revenue
Total Server Cost
Net Income
Note:
1.
2.
3.
4.

2001
$
4,200.00
50,000
2,000
$8,400,000.00
$3,076,000.00
$5,324,000.00

2002
$
4,200.00
68,000
6,120
$25,704,000.00
$ 9,412,560.00
$16,291,440.00

2003
$
4,200.00
92,480
12,945
$54,378,240.00
$19,912,794.00
$34,465,446.00

Focuses on saving benefits provided to the customers

Allows customer oriented sales strategy
Lower price than price of 4 Zink servers
Software is not explicitly taken into account for costing

RECOMMENDATIONS
Based on the above analysis of prices, we recommend value in approach to be followed by the company for Atlantic
bundle