ATLANTIC COMPUTERS

(A BUNDLE OF PRICING OPTIONS)

A Case Study

Name : SUJEET KUMAR VIKAS Reg No 011 / 2011 / PGEXP

Situation Analysis
An Atlantic computer is a largest manufactures of servers and other hi-tech products and have 20% revenue share in high performance sever segment. The high end performance server Radia was sold to large Enterprise customers and it was known for providing top notch highly reliable product quality and post sales assistance. Due to growth of internet, demand for basic servers is increasing rapidly; to meet the demand company is planning to launch a basic server TRONN with a software tool PESA which will increase the efficiency of server approximately four times. The competitor Ontariowas in the basic server segment having 50% market share by revenue and a product ZINK. The performance of Zink was equal to performance of Tronn. Jason Jowers has to plan launch of TRONN keeping in mind, the major competitive threat from Ontario which was generating its major sales from online business.

Case Analysis
In this case, Atlantic Computer is a manufacturer of servers and high-tech products. Two market segments exist in the server industry: High performance and Basic Servers. Atlantic Computers has held a 20% share of the High Performance market with their Radiaservers being their premier product. However, the market for Basic servers is growing and this has caused Atlantic Computers to develop and introduce a Basic Server called the Tronnand a software tool called the Performance Enhancing Server Accelerator (PESA).

The Tronnwas developed mainly for the emerging US market opportunity for basic servers. The PESA would allow the Tronnto perform up to four times faster than its standard speed and make frequently requested information more accessible. Thus, bundling the Tronnand PESA made more sense.

Atlantic is not concerned that the Tronnwill be considered a substitute forits High Performance servers.

Problem Area
What pricing strategy should Atlantic Computers implement to price the Atlantic Bundle?

To develop pricing strategy for Atlantic bundle-new TRONN server and the PESA software tool. What would be the reaction of customers, sales force and senior management of Ontario to pricing of Atlantic Computers?

Pricing Strategy
There are four options of pricing strategies which Atlantic Computers can choose. First, Atlantic Computers could stay with the status quo and offer software tools for free. Second, it could choose competitive based pricing. Third it could choose from Cost-pluspricing. Finally, it could choose value-in use pricing.

OPTION: 1

Status Quo Pricing

S.No. 01 02 03 04 05 06 07 Particulars Total Market Volume Market share Volume share Unit price of Basic Server (tronn) Unit price for 2 Tronn Servers Unit price of PESA per server Price of Atlantic Bundle Total Revenue 2001 50000 4% 2000 $2,000 $4,000 Free $4,000 $40,00,000 Years 2002 70000 9% 6300 2003 92000 14% 12880

$1,26,00,000

$2,57,60,000

Output: $4000 for two tronn servers

OPTION: 2

Competition Based
S.No 01 02 03 04 05 06 07 08 09 Particulars Market Volume Market share Volume share Unit price of Basic Server(tronn) Price for 2 Tronn Servers Price of Basic Server(Ontario Zink) Price of PESA per Server Price for 4 Ontario Zink Servers Price of atlantic Bundle Total Revenue 2001 50000 4% 2000 $2,000 $4,000 $1,700 $1,400 $6,800 $6,800 $68,00,000 Years 2002 70000 9% 6300 2003 92000 14% 12880

$1,26,00,000

$2,57,60,000

Output : $6,800.00 for two tronn server

OPTION: 3

Cost Plus Pricing

S.No. 01 02 03 04 05 06 07 08 09 10 Particulars Market Volume Market share Volume share PESA Segment PESA R&D Cost (sunk cost) PESA Total Segment Per Unit PESA Cost Margin(30%) Total Price Price For 2 Servers + 2 PESA Total Revenue 2001 50000 4% 2000 1000 2000000 10590 188.86 245.51 $2,245.51 $4,491.03 $44,91,029.27 Years 2002 70000 9% 6300 3150 2003 92000 14% 12880 6440 Total

21180 10590

$1,41,45,742.21

$2,89,22,228.52

Output : $4491.03 for two tronn server with PESA

OPTION: 4

Value-in use Pricing

S.No. 01 02 03 04 05 06 07 08 09 10 11 Market Volume Market share Volume share Source Of Saving Price of 2 Tronn Servers (+)Labour (+)Electricity (+)Licensing Fee Total Savings Using 50 - 50 Value Pricing Model Price of Atlantic Bundle for two tronn server with PESA Total Revenue Particulars 2001 50000 4% 2000 Saving to Buyer 2800 4000 500 1500 $8,800 Years 2002 70000 9% 6300 Atlantic Share(50%) 1400 2000 250 750 $4,400 2003 92000 14% 12880

$8,400 $84,00,000

$2,64,60,000

$5,40,96,000

Output: $8400 for two tronn servers with PESA

Summary of total revenue generated in three consecutive years by adopting above four different pricing methods can be tabulated as:

Years
2001 2002 2003 Competition Based pricing 6800000 21420000 43792000

Total Revenue generated by different methods

Status Quo Pricing 4000000 12600000 25760000 Cost Plus Pricing 4491029.27 14145742.21 28922228.52 Value in use pricing 8400000 26450000 54096000

Graphically this can be represented as:

60000000

50000000

40000000 Competition based pricing 30000000 Status Quo Pricing Cost Plus Pricing 20000000 Value in use pricing

10000000

0 2001 2002 2003

Summary of total Profit generated in three consecutive years by adopting above four different pricing methods can be tabulated as:

Comprative statement of Profit By Using above mentions methods of pricing Methods Adopted Descriptions Status Competition Cost Plus Value in Quo Based Approach use
Number of Units over 3 years Calculated price of Atlantic Bundle ($) per unit Total Revenue generated from Sales ($) of all Bundels Variable Cost per unit ($) Total Variable Cost ($) 21180 21180 21180 21180

2000

3400

2245.51

4200

42360000

72012000

47559901.8

88956000

1538 32574840

1538 32574840

1538 32574840

1538 32574840

Fixed Cost (Sunk Cost ) for development of PESA ($) Total Cost (in $) Profit (in $)

2000000 34574840 7785160

2000000 34574840 37437160

2000000 34574840 12985061.8

2000000 34574840 54381160

Graphically this can be represented as :

60000000 50000000 40000000 Status Quo 30000000 20000000 10000000 0 Profit (In $) by Different methods Competition Based Cost Plus Approach Value in use

Conclusion
From the above graph it is clear that Value in use pricing method gives higher profit continuously for three years. Second highest profit is achieved by Competitions based pricing method. Third Highest is achieved by Cost plus approach pricing method and least profit is achieved by Status Quo method. The two extremes of prices in the above graph i.e highest and lowest price is neglected because of following reasons: If the price of product is the lowest in the market price then the consumer start presuming that the product is inferior. If the price of product is highest in the market as in this case then the consumer prefer to buy two numbers of similar product in place of one single costly product.

In the middle two ranges Profit earned by Competitions based pricing method is 2.88 times more than Cost plus approach pricing method. So it is better to adopt Competitions based pricing method because of following reasons: Market is Competitive so price should be competitive. Highest profit earned under competitive price

Recommendation:
Based on the analysis performed for pricing strategy using 4 different approaches, it is recommended to go with Competitions based pricing method Approach.