Marketing MIM 2012 ATLANTIC COMPUTER CASE

Group E Carolina Ydrovo Rikhia Chakraborty Alexander Knig Visvha Aparakka Daniela Cappellin

PROBLEM STATEMENT Atlantic Computer is a large manufacturer of servers and other high-tech products. This company is planning to launch its new product, which is the Atlantic Bundle (Tronn Server + Performance Enhancing Server Accelerator PESA) that would allow Tronn to perform up to 4x faster than a standard basic server. The company is developing a new pricing strategy, to place this product in the Basic Servers Market Segment. The management is confronted with 4 different pricing strategies: Status-Quo Pricing; Competition Based Pricing; Cost Plus Pricing; and Value-In-Use Pricing. SITUATION ANALYSIS There are two main market segments in the server industry: i) High Performance Servers where Atlantic has captured 20% market revenue share which is predicted to grow at a rate 3% for the next two years ii) Basic Servers which is a newer segment and is predicted to grow at about 36% compound annual growth rate through 2003. Atlantic Computer sees a future in this market, and thus they want to tap into this segment, where they want to use their new bundle pricing strategy. The software tool (PESA) will allow the servers to perform up to 4x faster than the standard speed of any other server in the current market. The biggest competitor in this Basic Server market segment is Ontario Computer Inc. with a 50% revenue market share. The majority of Ontarios sales are generated online. Their server, Zink, performs in the same level as Tronn, but with the power of 4 servers, because they lack the PESA software tool, which Atlantic Computer has. PRICING SOLUTION TO CONSIDER
Pricing Solution Status Quo Pricing Competition Based Pricing Cost Plus Pricing Value in Use Pricing Price $2000 $3400 $2246 $4200 Reasoning Cost of Tronn (Basic) Server Computation $2000 + Free Software

Each Tronn server has the capabilities of 2 Zink $1,700(price of each Zink Server) X 2= servers $3,400 Base Price of Tronn Server + Price to develop each PESA + 30% Mark-up Comparing savings of Tronn Server vs. Zinc Server + base price of Tronn $2000 + $246 (Price to develop each PESA + 30% Markup) $2200 (Savings from buying Atlantic) + $2000 Tronn base price

Refer to Exhibit 1 for the breakdown of the calculations PROS & CONS - ALTERNATIVES 1) Status Quo: Pros: By giving the software tool out for free, will initiate more customers to purchase their Tronn Server, as Atlantic Computers is offering a more efficient tool with it for free. Customers

will also not be hindered by the fact that they are offering the software for free, because that is what they are used to in the past. Cons: Atlantic will lose the intangible value of the softwares competency which makes the servers work 4X the speed if they give away the software for free. The PESA software development fixed cost is $2,000,000, which the company needs to recover, to make profits so they cannot afford to launch it for free. 2) Competitive-Based Pricing: Pros: This gives Atlantic Computers to compete as a strong substitute to the already existing market of Zinc Servers, because now at the same price, Atlantic Computers is offering a same, but a better product. Cons: Once again, the intangible, added value of a faster and a more efficient server will be lost, as Atlantic will not be differentiating their product in terms of pricing leading to a price war. Also the brand will be too associated with the Zinc Servers 3) Cost- Plus Pricing: Pros: By charging a lower price, Atlantic Computers, can enter the market offering a more efficient software at a cheaper price (differentiating pricing & efficiency), which can attract the customers of the Ontario products. Cons: Due to limited mark up of 30%, this provides the possibility of only being able to sell 50% of the servers with the PESA as opposed to selling them all. 4) Value-in-Pricing: Pros: Highest price, which covers all expenses related to the manufacturing of the software, also generates the highest profit. Also with this, pricing, the perception from the customer for the Atlantic Bundle will be a premium, more efficient product. Con: Price of the Atlantic Bundle could be considered too high for the average customers of that market initially. IMPLEMENTATION STRATEGY The best option for Atlantic is to price the Tronn Server using the value-in-use pricing method in combination with a price penetration strategy and thus initially sell the Atlantic bundle for $3.4001. They can motivate the customers to buy their product and Atlantic can compete with Ontario's low price strategy. Plus, they need to continue with their sales force by always communicating the addition-money-saved message, so when selling the lower-priced servers, customer will see the amount of money that they save. Following that, the company will be able to raise the price to $3,700 by September 2000 and then further increase it to $4,200 until June 2002.2 This strategy will lead to profits, over the next 3 years, totalling to $51,356,160. Atlantics management should focus especially on a marketing differentiation and high customer oriented service satisfaction strategy.

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Why $3.400? Because this would be the price with the competition based pricing approach

Each time the price increases Atlantic should come out with a new updated version of the software so that price increase can be justified.

CUSTOMER PERCEPTION The Atlantic Bundle will not have the same value for every customer; it will be worth more for customers in the web-server and file-sharing application segments (target market). As the Tronn with the PESA software is 4x as fast, than the low-end Tronn (Basic) servers, the introduction of this new server will prove to be more beneficial for these customers. However, due to Tronns higher price, customers will initially react with hesitation. In order to clear out this hesitation, Atlantic Computers will utilize their newly trained sales force to communicate that the innovative solution, not only gives the customers faster server service, but also adds a monetary value. With Tronn in place, customers will be able to save $2,200 per server as they incur fewer costs of buying more servers, which in turn would save them electricity costs, office space, additional labour costs, and supplemental software licence fees. RECOMMENDATION & PLAN OF ACTION Oct. 2000: Reaction of Matzer: First, Matzer will react negatively to the L-R value-in-use-pricing strategy for two reasons: i) Charging a price for PESA is contrary to Matzers approach of giving the software away for free; ii) He will resist against the price charged for the server as it conflicts with his traditional approach of selling servers. However, Jower can still convince Matzer by showing him that Tronn will be initially introduced at $3,400 and be raised to a final-value-in-use of $4,200 (gross margin of $2,662, or 63%). In this way Matzer will see the advantages and therefore be more convinced of the new price strategy. Matzer has a strong influence on Atlantics management, thus he should explain the strategy to the top management, thereby making Jowers approach successful. Nov. 2000: Reaction of Sales Force: Jower then needs to approach Cadena and the Sales Force, because the sales force is the most important asset required to succeed with the value-in-use strategy. Cadena and the Sales Force will react unfavourably to the new strategy, because now, they have to sell a server which is more than 70%3 more expensive as before and they also have to sell software which they had previously given out for free. Jower needs to explain to them that the product will revolutionize the server-industry and will lead them to success. He has to highlight the advantages for the sales force: they will be able to earn higher commissions because the products are sold at a higher price; they can be the forerunners in their industry, selling this innovative solution. The Sales force also needs to be trained such that they sell the package on the basis of five concepts: 1) Sell the servers more as a new solution than as normal server. They should differentiate in the marketing
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$2000 -Initial Price ; $3400 - New Price, 70% Price Increase

approach by focusing on the efficiency that their servers are 4x more productive. They have to demonstrate the importance of bundle pricings. 2) Focus on the value added through the efficiency of the server. 3) As customers are very knowledgeable, the sales force has to clearly explain the amount of savings (totalling to $2,200 per Server) incurred by employing the Tronn+Software, by highlighting the lower costs4. 4) Emphasize on the highly innovative and new PESA software and highlight advantages of it as compared to softwares employed by other competition. 5) As higher margins are earned by salesperson much better service will be provided, thus raising customer satisfaction. 2001: Tronn is introduced in the market. Atlantic Computer will probably capture only a small portion5 of the basic server market share over the year. Therefore, Ontario will probably not react. Consumers will be convinced by the high performance of Tronn, due to the good sales service and the servers efficiency, thereby increasing brand loyalty. Ontario will fail at customer service satisfaction as it is a web based supplier. Demand for Tronn will rise as well as its price. 2002: Atlantic Computer would have already captured a larger piece of the market cake, and by then, Ontario will start counter-acting. Atlantic will raise Tronns price to $4,200 until June. End 2002: Atlantic can expect Ontario to lower its price. Lets assume the worst-case scenario in which Ontario starts a price war and lower its prices to its production cost of $1,214. Atlantic lowers the price to its cost of $1,538 as well. However, as 4 Zink servers are needed to compete with just 2 Atlantic servers, Tronn is still saving $1,7806 over Zink. Thus customers will continue to buy Tronn. Atlantic sustains the price war, as Ontario wont be able to operate on costs and still lose market share in the long-term. Beg. 2003: Ontario will copy the PESA software. 2003+: In the long run, Atlantic should try to cover its R&D costs as fast as possible. Also it can consider the option of selling the Software to Ontario. Once they have successfully sold7 the software, Atlantic can start giving out PESA for free and sell the server for a lower price. In this way Atlantic could even further extend its market share. As Ontario earns most of its revenue in the online market, in the L-R Atlantic should try to expand in the online segment as well and shift its marketing & customer servicing strategy towards the socialmedia trend.
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electricity and office-space consumption, lower labour (administration) costs and lesser software licencing fees The assumption is based on the cost-plus projection that in the 1st year 4%, 2nd year 9%, and 3rd year 14%. 1780 = 4*1214 - 2*1538 - (Zink cost - Tronn cost) Selling price: < R&D cost. Thus, < $ 2.000.000

EXHIBIT 1 Re nueCalculations ve Total Units Rev. 2001 (2000/12)*9*$3400)+(2000/12)*3*$3700 Rev. 2002 ((6300/12)*6*$3700) + ((6300/12)*6*$4200)) Rev. 2003 (12880*$4200) Price without PESA for Cost-Plus approach Price per Atlantic Bundle ($) Total Re nuefromSale ($) ve s Variable cost per unit ($) Total VariableCos ($) t Fixed Cost for development of PESA ($) Total Cos ($) t Profit ($) Co st-Plus Pricing Value -in-use Com tition Bas d pe e Status Quo Pricing Pricing 21.180 21.180 21.180 21.180 $6.950.000,00 $24.885.000,00 $54.096.000,00 $2.000,00 $2.245,51 $2.000,00 $3.400,00 $ 47.560.000,00 $85.931.000,00 $42.360.000,0 0 $72.012.0 00,00 $1.538,00 1538 $1.538,00 $1.538,00 $ 32.574.840,00 $32.574.840,00 $32.574.840,0 0 $32.574.8 40,00 $2.000.000,00 2000000 $2.000.000,00 $2.000.000,00 $ 34.574.840,00 $34.574.840,00 $34.574.840,0 0 $34.574.8 40,00 $ 12.985.160,00 $51.356.160,00 $7.785.160,00 $37.437.1 60,00

Cos t-Plus Pricing Tronn sales -units (2001+2002+2003) Tronn sales with a PESA - units (2001+2002+2003) Development cost of PESA Unit cost of PESA Mark-up per unit of PESA (30% of cost) Per unit PESA price Total price (1 Tronn server + PESA software tool) Value -in-us Pricing e Savings from : 2 Tronn servers vs. 4 Zink Servers Savings from: Labor (2 servers vs. 4 servers) Savings from: Electricity (2 servers vs. 4 servers) Savings from: Additional software application licenses(*) Total savings (when buying 2 servers with PESA instead of 4 without PESA) Savings transferred to customer (50%) (through price) Divided by 2 (2 PESA for the 2 servers bought) Total price (1 Tronn server + PESA software tool)

21180 10.590 $2.000.000 $188,86 $56,66 $245,51 $2.246

$2.800 $4.000 $500 $1.500 $8.800 $4.400 $2.200 $4.200

(*)We assume that a software tool like PESA is charged the same license of $750 that is usually char ged for application software.

Status -quo Pricing Price of 1 Tronn Price of 1 PESA Total price (1 Tronn server + PESA software tool) Com tition-bas d Pricing pe e Price of 4 Zink servers Equivalent charged for only 2 Tronn servers with PESA (4 Zink / 2) Total price (1 Tronn server + PESA software tool)

$2.000 $0 $2.000

$6.800 $3.400 $3.400

The principle ideas are based on the assigned case Atlantic Computer: A Bundle of Pricing Options. Neeraj Bharadwaj and John B. Gordon. Harvard Business. May 28, 2007.