Case Study #4

Atlantic Computer: A Bundle of

Pricing Options

MBA SBM ITB

General Management 9
MM5003 - Marketing Management
Semester 1 – 2019/2020

Syndicate Group 10:

Istifani Sadiya 29319094
Nadia Rahmi Chairunisa 29319063
Raka Nuralif Verdiyanto 29319102
Yoanita Sabilla 29319022
Yongsu Kim 29319705
Syndicate Group 10 Atlantic Computer September 11th, 2019

1 Case Synopsis
Jason Jowers as a young product manager at Atlantic Computer, a large manufacturer of servers
and other high-tech products have to set up pricing for the company’s new bundling product. The
bundling product called ‘Atlantic Bundle’, consisted of The Tronn, a server and PESA
(Performance Enhancing Server Accelerator), a new software tool of their company. The Atlantic
Computer is a strong player in High Performance Service market segment but they want to enter
newer segment for Basic Servers. Basic Servers market segment is expected to demand about
50,000 units in 2001. Jason Jowers should get the pricing right for their bundling product. The
deadline is two weeks to find out which business are most likely to benefit from their new offering
also predict how customers are likely to react and how competitors are likely to respond to the
recommended pricing strategy.

2 Statement of Problem
Jason Jowers is new to Atlantic Computer and got his first task for developing a pricing strategy
for its “Atlantic Bundle” – the new Tronn server and the Performance Enhancing Server
Accelerator (PESA) software tools. He needs to develop a pricing strategy that can be profitable
in the market and take away market share from its competitors within two weeks. Its competitor is
Ontario which accounts for 50 percent share in new market. There are several key factors
influencing the pricing strategy for the “Atlantic Bundle” that he had to keep in mind:

1. Atlantic Computer could stay with the status quo and offer software tools for free.
2. Charge a price equal to its competitor, Ontario Zink.
3. Charge a price based on a cost-plus pricing.
4. Charge a price based on value-in-use pricing.
The director of sales, Jairo Caden’s sales force compensation structure was roughly a 70 percent
and a 30 percent commission. That was explaining Cadena’s view of the pricing strategy. So, the
second agenda for Jowers would be to sketch out for Cadena how to get the Division’s sales force
to charge for the PESA.

3 Framework as the Analytical Tools

3.1 Analysis 1
STP FRAMEWORK

• Segmentation
o Industry sector: Software server market
o Geography: U.S
o Demographics: Small and medium enterprise

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Syndicate Group 10 Atlantic Computer September 11th, 2019

o 3 segments of Atlantic bundle’s with different products;

A. Radia, High-End Performance Server (current)
B. Tronn, Basic Server (on-going/proposed)
C. Performance Enhancing Server Accelerator (PESA) Software (on-
going/proposed)

• Targeting
Atlantic computer as a server provider company targeted to enter main market segment and
gain market share. The basic server that is expected to demand about 4% or 50.000 units
in 2001, 9% or 70.000 units in 2002, 14% or 92.000 units in 2003 and register about a 36%
compound annual growth rate through 2003.

• Positioning
o With the new PESA server from Atlantic computer, will help to improve your
server performance.
o Those who need to improve server performance, PESA product from Atlantic
computer would allow the Tronn to perform up to four time faster than its standard
speed (go up to 4x faster)
o Atlantic computer as the new player software for basic server segment.

SWOT Analysis

• Strength
o Brand image: Atlantic Computer Inc. has been competing in the market server for
30 years, known for their top notch, highly reliable, high quality, and responsive
post-sales assistance.
o Largest player in the overall computer industry
o Tronn + PESO bundling: Atlantic’s basic server, Tronn, could perform 4 times
faster than the standard speed when combined with PESA.

• Weakness
o Relied on only direct sales, while Ontario generated online sales
o The PESA tools would slow down the server when used in high performance
applications
o Captured only 20% of market share for basic server segment

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Syndicate Group 10 Atlantic Computer September 11th, 2019

• Opportunity
o Huge demand for the server segment in the following year
o Potential and growing market for basic computing in companies

• Threat
o Customers are used to free software tools
o Ontario as the main competitor for basic server segment, owns 50% of the market
share
o Ontario might create similar bundling strategy with lower costs.

Respond of Ontario’s Zink to Atlantic Bundle

In response to this Atlantic Bundling, Ontario might not be interested in taking any actions at the
first year of establishment. Since the price of the Tronn is slightly higher than the Zink, which is
on the same segment, they would not see this product as a threat. By the time consumers begin to
understand the saving benefit of the bundling and Atlantic starts to infiltrate the market, Ontario
will begin to take actions.
For the short-term plan, Ontario might lower the price to attract more customers, give discounts,
and maximize their online sales. This action, eventually will start reducing their profit. For the
long-term plan, Ontario might copy the bundling strategy with free software tools, or create a
similar software tools to PESA with lower costs, emphasizing on the saving the costumer will get
from buying their bundle.

3.2 Pricing Strategy Analysis

Based on the case given, assume that the Atlantic Computer will be able to sell all of the Tronn
servers it can produce, and Atlantic’s resulting share of the basic server segment (in units) will be
4% in 2001, 9% in 2002, and 14% in 2003. Assume a 50% attach rate (half of all the basic servers
sold will be loaded with the PESA). Assume the PESA development costs will be paid off over
three years. Assume also targeting a 30% markup above costs.

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Syndicate Group 10 Atlantic Computer September 11th, 2019

Refer to Exhibit 1, we can conclude that:

Database of Basic Market Projection Total Market Projection
Server Market 2001 2002 2003 (Units)
Estimated Market (Units) 50,000 70,000 92,000 212,000
Atlantic Market Share 4% 9% 14% -
Atlantic Market (Units) 2,000 6,300 12,880 21,180
PESA Market (Units) 1,000 3,150 6,440 10,590

1. Status Quo Pricing

Status Quo strategy stick with company tradition by charging only for hardware and give the
PESA software tool away for free. This strategy means Atlantic Computers will loss research
and development costs in the amount of $2,000,000. Exhibit 3 depicts the price per Tronn
Server of $2,000 and cost per Tronn Server of $1,538, here is the simple financial calculation
through Status Quo strategy.

Financial Projection 2001 2002 2003

PESA Sales ($) 2,000,000 6,300,000 12,880,000
Projected Cost ($) (1,538,000) (4,844,700) (9,904,720)
Projected Profit ($) 462,000 1,455,300 2,975,280
Total Gross Profit ($) 4,892,580
R&D Cost (2,000,000)
Total Net Profit ($) 2,892,580

Customer will comfort by this approach and there will be no doubt because customer
always belief that software tools are just “part” of the server and should be provided for
free. By only paying $2,000 per server, customers will get four times better quality than
what competitors offer. This is the lowest price bundling option, but actually this method
does not capture the total value of the product.

2. Competition-based Pricing
Competition-based pricing generally uses the same price as competitors rather than
considering costs. In this case, Atlantic Computer should charge the bundling package with
the equal price as Ontario Zink did for four servers. Exhibit 3 shows the price per Zink
Server of $1,700, so we get conclusion that the bundling package sales price equal to

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Syndicate Group 10 Atlantic Computer September 11th, 2019

$6,800 through aggressive approach. Here is the simple financial calculation through
Competition-based strategy.
Financial Projection 2001 2002 2003
PESA Sales ($) 6,800,000 21,420,000 43,792,000
Projected Cost ($) (1,538,000) (4,884,700) (9,904,720)
Projected Profit ($) 5,262,000 16,575,300 33,887,280
Total Gross Profit ($) 55,724,580
R&D Cost (2,000,000)
Total Net Profit ($) 53,724,580

While selling at this price would generate more profits for Atlantic Computers, it is not
certain that customers would purchase that bundling package at this price. Customer may
question about price strategy and expect a lower price (if customers only need one server
with software tools, why customers still paying for four).

3. Cost-plus Pricing
Cost-plus pricing is a strategy to determine the price of product or service that uses direct
cost whether related to the production and predetermined percentage of these costs is added
to provide a profit margin. Atlantic Computer adjust approximately 30% of profit margin
based on this method. Financial implications:
Cost of Atlantic Tronn Server : $1,538
Cost of PESA per Server : $2,000,000 / 10,590 units = $189
Total Cost of Atlantic Bundle : $1,727
Profit Margin (30% Mark-up) : $518
Final Price of Atlantic Bundle : $2,245

Financial Projection 2001 2002 2003

PESA Sales ($) 2,245,000 7,071,750 14,457,800
Projected Cost ($) (1,538,000) (4,844,700) (9,904,720)
Projected Profit ($) 707,000 2,227,050 4,553,080
Total Gross Profit ($) 7,487,130
R&D Cost (2,000,000)
Total Net Profit ($) 5,487,130

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Syndicate Group 10 Atlantic Computer September 11th, 2019

4. Value-in-use Pricing
Value-in-use pricing is an approach of setting price to capture a portion of what a customer
would save by buying a firm’s product. For this case, assume a 50-50 sharing of the savings
gain with the customer and use conservative per annum estimate. Chris Matzer, head of
server division, said that PESA would allow the Tronn to perform up to four times faster
than its standard speed, it means that the conservative action allow them to boost two times
faster, while the aggressive condition enable to boost the maximum condition as four times
quicker. Based on conservative assumption, two Tronn servers equipped with PESA equal
to the four Zink servers.
Cost Information Two Zink Servers One Tronn Server
Electricity Cost $250 x 2 = $500 $250 x 1 = $250
Software License Cost $750 x 2 = $1,500 $750 x 1 = $750
Labor Cost $80,000 x 2 : 40 = $4,000 $80,000 x 1 : 40 = $2,000
Price of Server $1,700 x 2 = $3,400 $2,000 x 1 = $2,000
Total Price $9,400 $5,000

Savings : Two Zink Servers – One Tronn Server = $4,400

Profit Sharing : $2,200 (based on 50-50 sharing)
Price of Atlantic Bundle : Normal Price + Profit Sharing Price
: $2,000 + $2,200
: $4,200

Financial Projection 2001 2002 2003

PESA Sales ($) 4,200,000 13,230,000 27,048,000
Projected Cost ($) (1,538,000) (4,844,700) (9,904,720)
Projected Profit ($) 2,662,000 8,385,300 17,143,280
Total Gross Profit ($) 28,190,580
R&D Cost (2,000,000)
Total Net Profit ($) 26,190,580

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Syndicate Group 10 Atlantic Computer September 11th, 2019

Break Even Point (BEP) Analysis on R&D Cost per Profit Margin
Atlantic Bundle Status Quo Competition-based Cost-plus Value-in-use
Price 2,000 6,800 2,245 4,200
Cost 1,538 1,538 1,538 1,538
Profit 462 5,262 707 2,662
BEP (Units) 4,329 380 2,829 751
BEP (Year) 2003 2001 2002 2001

4 Recommendations
Even though, competition-based pricing is the most profitable option based on BEP analysis,
we recommend Atlantic Computer to go for value-in-use pricing strategy. There are three
points why value-in-use pricing strategy is the suitable decision for Atlantic Computer:
1. Value-in-use pricing is the second highest total net profit and the second lowest BEP.
2. This strategy can show more value and better foundation for sales strategy to customers
by showing them the monetary benefits.
3. Help sales force division to demonstrate the savings to the customer from purchasing the
Atlantic Bundle versus buying four Ontario Zink servers (utilize less labor and electricity
and secure fewer software application license).

Recommendations for Sales Force Division

To increase the awareness about new pricing strategy and increase the ability to deliver the
substantial material which are interesting and convincing customers, every sales people needs
to be trained well. The training material should be conducted based on these topics:
1. Emphasize that PESA will increase Tronn server performance significantly.
2. Demonstrate the new pricing strategy with mathematical count or empirical data.
3. Demonstrate the sales people how much commission they can generate by charging for
the PESA and using value-in-use pricing strategy.
4. Communicate about the savings benefit if customer buying Atlantic bundle product.
5. Equip the sales team with the tools to overcome customer’s concern and underline about
the lower acquisition and possession costs (less labor and electricity cost, fewer software
application license, and others possible cost).
6. Ascertain excellent after sales service to the customers.

5 Lesson Learned
To start a sustainable business, it starts from a thought process and we must have a strategy to
make the business grows. Seeing from this case, a good product is how we envision it by being
relevant with the ongoing changes through times. From this particular case, Jowers thinks that to

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Syndicate Group 10 Atlantic Computer September 11th, 2019

market its products without having to be conventional, through the PESA tool which works simply
by repeatable and relying on an internet connection. Jowers develops his business with low cost
budget by using the internet to generate profits.

From that case, we can learn that to start a business, we need confidence, verbatim to what the
professor said, "to be a successful businessman you must be prepared to lose, get your hands up
and look out, look back and look forward.''
Jowers’ strategy in marketing products is to take advantage of the internet with free software
provided for the customers. However, the software used must be licensed, in the sense that the
software does not violate.
Through the internet or online network, Jowers sends his product report, and while offline he only
explains its advantages, because in detail Jowers has explained in PESA tools.

In addition, Jowers also learned a lot from customers, by examining what items are recommended
from each item he has sold to the customers. Don't forget to save from every profit you get from
each sale. Because one of the keys to success in business is "save the money".
Also listen when you're meeting with the customer, what are the wishes of the customers, what are
the needs, learn from each reaction from the customers.

From every sale, Jowers only takes a little profit. He focuses on how to make his business runs
sustainably and keep on thinking that quality will improve over time. And he doesn’t forget that
every advantage to be set aside to pay for licenses from tools and servers, so that the system runs
continuously.

6 Creative Support
• A Quick Guide to Value-Based Pricing

https://hbr.org/2016/08/a-quick-guide-to-value-based-pricing

• Break-Even Analysis
https://www.investopedia.com/terms/b/breakevenanalysis.asp
• What is Break-Even Analysis?
https://corporatefinanceinstitute.com/resources/knowledge/modeling/break-even-
analysis/