Marketing Management

Atlantic Computer: A Bundle of

Pricing Option

MBA Core 2022-24

Section 2

Group: K1
Avanti Agarwal-22F216

Piyush Sunil Joshi-22F237

Rahul Sharma -22F242

Sandeep Reddy -22F249

Urvi Dodeja-22F262
 Atlantic Computers: A Bundle of Pricing Options

Introduction

Atlantis Computer is a major manufacturer of servers and high-technology products. It has worked
in the server sector for a total of 30 years. With "Radia," Atlantic has captured 20% of the High-
Performance market. With a bundle product dubbed "Atlantic product" that combines Tronn
software with a performance-enhancing tool called "Performance Enhancing Server Accelerator
(PESA)," the company is attempting to enter the basic server market. The Tronn server and PESA
tool would enable performance to be four times faster than before. With a 50% revenue market
share, Ontario Computer Inc. is the main rival in this Basic Server market segment. The vast majority
of sales in Ontario are made online. The task of setting up pricing for the business's new building
product has been given to Jason Jowers, a young product manager at Atlantic Computer. The
various elements affecting the product's price strategy are as follows:

1. Stick with the company’s tradition and charge only for hardware and give PESA software tool free

2. Charge a price equal to its competitor, Ontario (Zink servers)

3. Charge a price base on a cost-plus pricing

4. Charge a price based on value-in-use pricing

The Problem Statement:

What pricing options and final price should Jowers charge DayTraderJournal.com for the
Atlantic bundle (i.e. Tronn Servers + PESA Software tool)?

1. What is the situation that the key protagonist, Jason Jowers, faces?

Jason Jowers was a young product manager, a freshly recruit who was hired 4 months ago and
has an MBA. He has just finished his management rotation which included various projects in
product management, strategy, and business development. He has been tasked to develop the
pricing strategy for the “Atlantic Bubble” (i.e., the new Tronn server and the PESA software
tool). Atlantic Computer is a large manufacturer of servers and other high-tech products. Jason
has been assigned to decide the pricing strategy for the Atlantic Bundle that consists of Tronn
server and PESA software tool.

2. What price should Jower charge DayTraderJournal.com for the Atlantic Bundle (i.e., Tronn
servers + PESA software tool)?

Status-quo pricing charges only for Tronn, while providing PESA free of charge as per company’s
tradition of charging only for hardware. It comes with advantages like cost which is
competitively low. It is a free software available for all customers. If a customer wants to include
PESA's development, they will have to pay a premium.

There is no mention of its software advantage. The product's positioning may resemble
Ontario's Zink.

As per Exhibit 3, Price of one Tronn Server = $2000

2 Tronn Servers + PESA software free = 2*2000 = $4000
Total Price of 2 Atlantic Bundles to Daytradejournal.com = $4000
Per Atlantic Bundle = $2000

Competition-based pricing charges the same price as the rival and offer PESA for nothing. We
estimated the conservative price, which is 2 times the cost of a Zink server in this situation; the
company would charge 4 times that amount. After three years, total profit is the second
highest, it is offered to customers for free. The cost is significant, whether we pay two or four
times what a Zink server costs. Customers most likely prefer four pieces of hardware to two
with superior software. There is no mention of its software advantage. The value of four Zink
servers won't be available to all clients.

Price of one Zink Server = $1700

2 Tronn Servers + PESA software free = 4*1700 = $6800
Total Price of 2 Atlantic Bundles for Daytradejournal.com = $6800
Price of 1 Atlantic Bundle = $3400

Cost-plus pricing is performed to determine the cost of the goods, add up all the expenses and
a markup percentage. It considers all associated costs with the product. The cost is acceptable
and comparatively modest. After three years, total revenue is the second lowest which is a con.
It doesn't base pricing on what the client wants, and thus won't be favored by all customers.

Cost incurred in PESA software development = $2000000

Cost of Tronn Server = $1538
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
Total Price of Atlantic Bundle (Tronn + PESA) = $ 2245

Value based pricing - The recommended price for this product is $ 4200 but we chose $ 4199
instead, because of the Odd-Even prices. As the customer would feel that the price is lower than
it really is. The value-based pricing strategy has been used because it is consumer based. Value
based pricing is a strategy to set prices according to the consumer’s perceived value of the
product. Checks all costs that the customer will enter during the life of the product and check
the value of the product in its customer. The total cost to Zink's competitors is $ 8,800 more
than Tronn. And the customer will save so much money, in the long run it is a reason to charge
PESA software.
 This pricing strategy contradicts the Atlantic tradition of providing software tools to their free
customer service, the software tool causes Tronn's computer to operate four times faster than
the normal operating speed. We chose to charge for extra speed and convenience because we
would like to indicate the highest level of server market. Hence, you can enter the market at a
higher price because people are willing to pay for quality.

Cost Savings Amount ($)

Saving in Electricity 500
Software Licenses 1500
Labour 4000
Cost of Server 2800
Total 8800
As per value pricing model of 50-50% Price of PESA 4400
2 Tronn + 2 PESA 8400
Per Atlantic Bundle 4200

Summary of Pricing
Atlantic Status Quo Competition- Cost-plus Value-in-use
Bundle based
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

3. Approximately how much money over the next three years will be “left on the table” if
the firm were to give away the software tool away for free (i.e., status quo pricing) versus
utilizing one of the other pricing approaches?

If Atlantic were to give away the software for free then,

Revenue earned by selling 21180 units in 3 years combined = 21180*2000 = 42,360,000

Cost of application software (to be borne by Atlantic) = 21180*1538 = 32,574,840

Total fixed cost (cost of developing software) = 2,000,000

So, total cost = 34,574,840

Profit = Revenue – Total fixed cost = 7,785,160

4. How is Matzer likely to react to your recommendation?

Matzer will react negatively to Value based pricing because of the following reasons:

 The pricing goes against the Atlantic’s tradition of offering the software tools for free.
He has used status quo pricing for nearly all the products offered by the company. He
will likely see this decision to be risky.

 Atlantic’s competitor, Ontario charges $1700 and Matzer has recommended $2000
because the competitor doesn’t have a great product for basic server. This decision will
be strongly opposed by Matzer as the selling cost is more than the double of the
competitors and would require a great deal of explanation.

5. How is Cadena’s sales force likely to react to your recommendation?

Sales Force – They are the most important asset for Value Based strategy. It is probable that
Salesforce will react unfavorably to this recommendation because now the prices are more
expensive, and they also have to sell software which previously they used to sell for free.

Recommendation for sales force - The sales force needs to be trained to highlight the benefits in
long term. They will have to explain the customer the additional benefits that can be achieved
using this product and explain about the reasons why the product is superior then the
competitor’s product Zink.

6. What can Jowers recommend to get Cadena’s hardware-oriented sales force to

understand and sell the value of the PESA software effectively?

Jowers can recommend the salesforce to explain the advantages of the product. The salesforce
should explain customers the product details emphasize that PESA will increase Tronn server
performance.

He can also recommend salesforce to show that Tronn is 4X efficient than basic server.

The salesforce can explain the customers their reasonable price by mathematical count. They
can show customers the savings they will make by buying Tronn server and getting much higher
value with value-based pricing.

The customers can be ascertained of the higher quality and service which they will be getting
post purchase, thus gaining benefits after sales also and increasing their satisfaction.

The customers can be encouraged to post review about the product and those giving review can
be given some coupons/discounts to increase the no of reviews. These reviews can be used as
reference for other customers and increase sales of PESA software.
 7. How are customers in your target market likely to react to your recommended pricing
strategy? What response can be provided to overcome any objections?

In the initial phase of the launch the customers would not like the Atlantic bundle and the sales
team will have a tough job in explaining the long-term benefits of the bundle to the consumers
since the price is high. The sales team needs to explain that 2 servers loaded with PESA will be
equivalent to having 4 basic servers and the fact that although their initial outlay would be
higher their long-term savings would be high because it is a quality product consumers would
be willing to pay the high prices and in value based pricing strategy appeals to most of the
consumers as it is a strategy which primarily focuses on customer satisfaction and value
creation

8. How is Ontario Zink’s senior management team likely to react to the Atlantic Bundle?

It is known that Ontario is price competitive company as they were able to reduce their costs
significantly and the introduction of Atlantic bundle would definitely affect them in the long run
and maybe in the short run as well and they would be able to reduce their market share and
one of the options available with Ontario would be to reduce their prices to maintain their
market share in mid to lower basic services industry and second option is that they can start
working on development of new software tools like PESA however developing new software
tools would take time and in the short to medium terms if they reduce the prices they would
not be able to generate enough profits as this strategy would not be sustainable so Atlantic so
either way it would be profitable for Atlantic to introduce the bundle in the market.

Estimated Revenue Calculations over three years:

Competition Cost Plus

Status Quo Based Approach Value in use
Estimated Number of Units over 3
years 21180 21180 21180 21180
Price Per Atlantic Bundle ($) 2000 3400 2245 4200
Total Revenue from Sales ($) 42360000 72012000 47549100 88956000
Variable Cost per unit ($) 1538 1538 1538 1538
Total Variable Cost ($) 32574840 32574840 32574840 32574840
Fixed Cost for development of
PESA ($) 2000000 2000000 2000000 2000000
Total Cost (in $) 34574840 34574840 34574840 34574840
Profit (in $) 7785160 37437160 12974260 54381160

It can be observed from above revenue calculation for different pricing strategies that profits
earned are highest when the pricing strategy of “Value in Use” is followed.
Conclusion

There are four methods for creating a pricing strategy. We determine that Atlantic would maximize
profits in the fourth scenario, where clients would be charged after the money saved was divided
into two equal parts.

With this choice, Atlantic Computers would have to break with history and charge for both Tronn
and the software PESA. Because this is a high-quality product that Atlantic developed, we would
charge more, and eager buyers would pay the higher prices. In the long run, the customer would
also be saving money.

The value-based pricing strategy will also appeal to most customers because it is focused on the
needs of the client and Atlantic only makes money if it reduces the customer's expenses.

This tactic might also compel Ontario to drop its prices to maintain its firm grip on the mid- to low-
priced server market.