MM_PGP23_AtlanticComputers_405_Pranav_S_Krishnan

Q1. 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.)
A. DayTraderJournal is a day trading company which provides information to prospective day traders
coming to sale booth. It needs web servers so that day traders can review articles and relevant training
information. From Exhibit 2, the test results show 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 different
pricing methods available are as follows:
1) The traditional approach
This option entails giving the PESA free in the Atlantic Bundle. Thus, customer has to pay only cost
of basic server which is $2000. Thus, pricing strategy excludes cost of PESA software development =
$2,000,000. Thus, price for DaytraderJournal will be $2000
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. Here, 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
Thus, price for DayTraderJournal in aggressive method will be = 1700*4= 6800
& price for DayTraderJournal in conservative mode will be = 1700*2= 3400
3) Cost-plus approach
From Exhibit 1
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
Thus, price for DayTraderJournal = $2245.1
Possession Cost = Electricity Cost + S/W License Cost + Labor Cost+ Acquisition cost
= 250 + 750 + 80000/40 + 2245.1= 1000+2000+2245.1= $5245.
4) Value-in-use pricing
In value-in-use attempt is made to capture a portion of what a customer would save by buying a firm’s
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
Total cost for Tronn = 4000 + 500 + 1500 = $6000
Total cost for Zink = 6800 + 1000 + 3000 = $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
Thus, price for DayTraderJournal = $3200
Possession Cost per server = Electricity Cost + S/W License Cost + 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 Zink's Sr. Management)
a) Matzer
Matzer’s belief is that software tools should be generally free for customers. But according to value-
in-use pricing strategy, the tools are not free and customers are paying $1200 extra per unit.
The following point will convince Matzer
The PESA software tool is making significant difference in performance for server. Server with PESA
is four times more productive than without PESA sever.
The R&D cost for developing PESA is $2,000,000

b) Cadena & salesforce

Cadena is attracted towards use of the competition-based pricing as it can produce high income.
According to the Cadena’s 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:
- Although the selling price in value-in-pricing is less than in competitive pricing but, the value-in-
pricing will increase the sales.
- The value-in-pricing structure can be used by sales persons to make the customers realize the
amount that they are saving by using the server with PESA
- 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 competitor’s 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
competitor’s 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 Zink’s Sr. Management)
The competitor’s reactions can be
- More budget would be allocated for R&D to replicate Tronn software tool model of PESA.
- Market product as more economically viable option as compared to Tronn server.
3. Compare the topline revenue implications of alternative pricing strategies to the firm over the
next three years?
A. Number of unit sales for three years = 10590
1) The traditional approach
- Price = $2000
- Revenue = 10590*2000=21180000
2) Competition Based Pricing
- Price (Aggressive) = 6800
- Revenue = 10590*6800=72012000
- Price (Conservative) = 3400
- revenue = 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