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Marketing Management I

ATLANTIC COMPUTER
A BUNDLE OF PRICING OPTIONS

CASE ANALYSIS NOTE (CAN)

UNDER THE GUIDANCE OF

DR. JOFFI THOMAS


(IIM KOZHIKODE)

GROUP 09
Name Roll Number
Archita Priya PGP/18/069
Jishan Kotangale PGP/18/079
Neeharika Nidadavolu PGP/18/089
Praveen GP PGP/18/099
Siddharth Mehra PGP/18/109
HarshadaWasade PGP/18/119
(SECTION B)
Decision issue in the case:
Determine a pricing strategy for Atlantic bundle-the new Tronn server and the PESA(Performance
Enhancing Server Accelerator) software tool before SME trade show.

Case Analysis:
Atlantic Computers is a manufacturer of Servers and other high-tech products. The two market
segments identified here are Basic segment and high performance segment. Jason Jowers, the product
manager of Atlantic Computers, was responsible for the pricing strategy of the Atlantic Bundle i.e. a
package of the Tronn server and PESA [Performance Enhancing Server Accelerator] software tool, which
is developed for the basic market. PESA would allow the Tronn to perform up to four times faster than
its standard speed.

Q1)What price should Jowers charge Daytraderjournal.com for 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.)

Solution:

DayTraderJournal is a day trading company which provides information and tips to prospective day
traders. It needs web servers to host the companys new website DayTraderJournal.com, where day
traders can review articles and relevant training information. From Exhibit 2, which showcases Atlantic
Internal Performance Testing Results, we can see that Tronn with Pesa(2222) scores four times as
compared to Tronn without Pesa(542).This further emphasizes the use of Pesa in the company.

The pricing strategy that Jowers should charge DayTraderJournal is Value-in-use.

The comparative study below will go on to explain our choice of pricing strategy. The prices according to
the various pricing strategies are as follows-

1) The traditional approach


This option entails giving the PESA free in the Atlantic Bundle.
Thus the cost would only include the cost of the Atlantic Bundle, which is equal to
2000$
This pricing strategy excludes cost of PESA software development = $2,000,000.
PRICE for DayTraderJournal(Acquisition $2000
Cost)

2) Competition Based Pricing


A pricing method in which a seller uses prices of competing products as
a benchmark instead of considering own costs or the customer demand.
Price of 1 Zink Server =$1700
We can follow to methodologies for this-
a) Aggressive- 1 Tronn Server is equivalent to 4 Zink Servers
b) Conservative- 2 Tronn Servers are equivalent to 4 Zink Servers
AGGRESSIVE CONSERVATIVE
PRICE for 1700*4=6800 1700*2=3400
DayTraderJournal(Acquisition
Cost)

3) Cost-plus approach
Atlantics share of Basic Server segment will be 4% in 2001,9% in 2002 and 14% in 2003
Projected Market Volumes by Segment
Year 2001 50,000
Year 2002 70,000
Year 2003 92,000

Cost of 1 Tronn Server = $1538


Expected Sales in 3 years = (4*50,000 + 9*70,000 + 14*92,000)/100
= 21,180
Given Attach Rate=50%. Thus, the number of servers with PESA=21180/2 = 10590
Cost of PESA per Bundle = Total R&D Cost/Number of units of PESA
= 2,000,000/10590
=$189
Total cost of Atlantic Bundle= Cost of 1 Tronn Server + Cost of PESA per bundle
= 1538 + 189
= $1727
Assuming 30% markup above cost, Final cost = 1.3*1727 = $2245.1
PRICE for DayTraderJournal(Acquisition $2245.1
Cost)

Possession Cost = Electricity Cost + S/W LicenseCost+Labour Cost+Acquisition cost

= 250 + 750 + 80000/40 + 2245.1= 1000+2000+2245.1=$5245.1

4) Value-in-use pricing
Value-in-use is a pricing strategy which sets prices primarily, but not exclusively, on the
value, perceived or estimated, to the customer rather than on the cost of the product or
historical prices.
An attempt is made to capture a portion of what a customer would save by buying a
firms product. Assumption: a 50-50 sharing of the savings gain with the customer.
Price of 2 Tronn servers = 2*2000=$4000
Price of 4 Zink servers = 4*1700=$6800
Tronn Zink Remarks
Electricity 500 1000 $250 per server
S/W License Cost 1500 3000 $750 per server
Total Cost 4000+500+1500 6800+1000+3000
=6000 =10800

Savings by Tronn = 10800-6000 = $4800


Given 50-50 sharing of the savings gain with the customer, savings on 2 Tronn Servers =
$2400
Thus, Total Cost for 2 Atlantic Bundles = 4000+2400 = $6400
PRICE for DayTraderJournal (Acquisition $3200
Cost)

Possession Cost per server = Electricity Cost + S/W LicenseCost+Labour Cost+Acquisition cost

= 250 + 750 + 80000/40 + 3200= 1000+2000+3200=6200

Jowers should charge Value-in-use pricing for DayTraderJournal because-

a) Low acquisition cost - $3200.00


b) On every Tronn that the company buys, it saves $1200 including all the operating costs.
c) Substantially high performance of the web servers

Q2. 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)

Solution:

a) Matzer
Matzers belief is that software tools should be generally free for customers. But the
recommended value-in-use pricing strategy, the tools are not free and customers are paying
$1200 extra per unit.
Matzer could be convinced by following points for charging on severs with PESA
1. The PESA software tool is making significant difference in performance for server. Server
with PESA is four times more productive than without PESA sever.
2. The R&D cost for developing PESA is $2,000,000
b) Cadena & salesforce

Cadena would of the view that we should follow the pricing strategy in which more revenue is
generated and go by the competition based pricing. According to the Cadenas sales force
compensation structure 30% is for commission. Therefore he would be inclined for higher
pricing of servers.

Cadena could be convinced for value-in-pricing by following arguments

1. Although the selling price in value-in-pricing is lower than in competitive pricing but the valu-in-
pricing will increase the sales.
2. The value-in-pricing structure can be used by sales persons and make the customers realize the
amount that they are saving by using the server with PESA
3. The customer is saving $1200 per tronn server including all the operating cost
c) Sr. Management at Atlantic

The senior management would recommend cost-plus pricing structure as it has been
traditionally followed the company. Also the priced arrived at by cost-plus pricing structure is
lower than value-in-pricing

The senior management can be convinced by the argument that the cost-plus pricing structure
do not promote the saving factor for customer which can increase the sales. Also the price of
the competitors product is high as compared to its performance therefore we can increase the
price for Tronn server which is twice as productive as the competitor.

d) Customers

Initially the customers would not be willing to buy Tronn sever as it is priced higher than the
competitors price.

But the customers can be convinced by giving the argument that although the Tronn server is as
productive as two Zink sever (conservative approach) but still it is priced much lower than two
Zink servers. The price of two Zink servers is $5,400 including all the operating cost but the
Tronn cost only $3,200.

e) Competition (Ontario Zinks Sr. Management)

The competitors reactions can be

1. More budget would allocated for R&D to replicate Tronn software tool model of PESA.
2. Market product as more economically viable option as compared to Tronn server.

Q3. Compare the topline revenue implications of alternative pricing strategies to the firm over

the next three years?

Solution: Number of unit sales for three years = 10590 (as calculated above)

1) The traditional approach


PRICE $2000
Revenue 10590*2000=21180000

2) Competition Based Pricing


AGGRESSIVE CONSERVATIVE
PRICE 1700*4=6800 1700*2=3400
Revenue 10590*6800=72012000 10590*3400=36006000

3) Cost-plus approach

PRICE $2245.1
Revenue 10590*2245.1=$23775609
4) Value-in-use pricing
PRICE $3200
Revenue 10590*3200=$33888000