CAN - Atlantic Computers: A bundle of pricing options

Group No:13

Issues
Atlantic Computers, are entering into new segment i.e., The Small and Medium-size Enterprise Systems Solutions. Pricing for this segment is a challenge. Performance improvement of the Basic sever has been achieved by installing additional software tool called PESA. So the Atlantic Bundle has Hardware and Software, with this pricing has one more challenge.
1. In Server purchasers domain, software tools are given for free, not charged in addition. 2. Price definition for Sales force to make PESA tool available to customers.

Any price definition made should address queries posed by Sr. Management, Competition, Customers, third party sales vendors, without compromising in revenue for the subsequent years.

Analysis Q: What price should Jowers charge Daytraderjournal.com do the Atlantic Bundle (i.e., Tronn Servers +PESA software tool)? Calculate the prices for alternative pricing strategies. (Note from the Planning the Strategy section in the case that Jowers make a conservative estimate that two Tronn servers plays PESA equals the performance of four Ontario Zink servers.)
Steps Involved in deciding the Pricing for (Atlantic Bundle):

1. 2. 3. 4. 5.

Calculate the Total cost involved in building the Basic server units. Calculate the break-even point to do minimum sales to retain the cost and go for profits. Taking the break even point, and revenue expectations set by Sr. Management; Decision has to be drawn to set the target unit of sales for each year After deciding on target sales for the year, decide upon pricing for each unit based on best fit pricing technique. The price decision above should involve the cost incurred for developing the PESA software also, which is provided in Exhibit 3. i.e., $2000,000

$2000 without PESA would be right price to charge Daytraderjournal.com. 1. In Exibit:3, it is given as Basic Serer cost is $1538 2. With the revenue margin set, server cost has been decided at $2000. This is also shown in Exibit:3. 3. Now the additional Fixed cost, $2000000 is incurred due to PESA software development. This also has to be added to the Cost per server 4. Assuming AC market share in unit of sales will capture 20%, as it is in High Performance servers, and assuming no additiona l profits from software development alone
20% of 50000 is 10000 units. For each unit $200 has to be added more to recover cost of PESA development in the first year. (2000000/10000 = $200 per unit) cost =>1538+200 = 1738 (all units in $) Price => 2000 + 200 = 2200 (all units in $)

5. Now, the total cost of server performing at high speed is

6. Two zinc servers(FC+VC) comes to $9400, one Tronn server assuming $2000, FC+VC comes to $5000; with this we can see 53% saving for the customer.

Analysis Q) Anticipate the reactions to your recommendation and formulate plans to address them, for the following individuals/groups: (a) Matzer (b) Cadena & salesforce (c) Sr. Management at Atlantic (d) Customers (e) competition (Ontario Zinks Sr. Management)

Reactions from various groups/individuals (Sr. Management of Atlantic)

What is the estimated unit of sales for projected years to recover the invested amount on PESA by additional charge in first year and make software tools for free?
1 year and estimated sales is 20% of projected 50000 in 2001 year.

What sacrifices do we need to do if we need to give away PESA for free along with Tronn server from the day 1?
Assuming the sales same as above i.e., 20% of projected 50000, the price band fixed for each basic server is 2000$ which has a margin of $462. So in the first year the profit contribution by basic server will be pulled down by 50% (since on each unit $200 iof PESA dev cost is incurred)

Customers, Sales force

How should sales force should sell software for the servers where competitors give it for free?
Since performance role played for different segments is not same. The sales force prices should be based on industry segment who downloads. Since, we have decided for free of COST, soles force can also distribute for free.

Analysis Q: Compare the topline revenue implications of alternative pricing strategies to the firm over the next three years?

PESA cost if given for free (Following Company tradition of only server is charged)
Dip in profit contribution by Basic server is 50% only in the first year. Subsequent years it will regain the profits as before. The positive side of it is, sales will raise up high in Medium and small Enterprise divisions in next years.

Charge a price equal to what the customer would pay for four competitors servers
Here Customers will have challenge to motivate to this price until and unless they believe in performance which is a long run test results. If sales remain same 300% revenue growth contribution by Basic servers. If sales dip, regaining the confidence and loyal customers will be a bigger challenge.

Charge a price based on a Cost-plus approach to pricing PESA

This is the figure shown in previous slides.

Value-in-use pricing
This approach is difficult to approve for all kinds of customers. So there will be challenge in justifying for all customers like Web Servers, File Servers and Mail servers. Keeping varied price for the same Hardware and Software based on Segment will loose customer confidence.