Atlantic Computer: A Bundle of Pricing Options

Arijit Goswami

PGP/21/259

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.

We have 4 routes for pricing. Let’s look into each one of these.

Traditional method

 The PESA software will be sold for free. The only thing to be priced will be the servers.
 Cost of Tronn (Basic) per server: $2000
 Cost per server: $1538
 The cost of software development, $ 2000000, will be foregone.

Competition based approach

 Cost of 4 Zink servers: $1700*4 = $6800

 Going conservative
o Atlantic Computer will sell 2 servers for the cost of 4 Zink servers.
o Therefore, cost of 2 Tronn servers with PESA = $6800, i.e., $3400 for each Tronn
server
 Going aggressive
o 1 server will be sold for cost of 4 Zink servers. Hence, cost of each Tronn server with
PESA is $6800.

Cost-plus approach

Expected sales in 3 years (from exhibit 1) = (4% of 50000) + (14% of 92000) + (9% of 70000) = 21180

Calculations Value
Expected sales of Tronn servers in 3 years 21180
Expected number of PESA installations 50% of 21180 10590
Cost of PESA per installation for break-even 2,000,000 / 10590 189
Total cost of Atlantic bundle 1538 + 189 1727
Mark up of 30% for sale 30% of 1727 518.1
 Final cost of Atlantic bundle 1727 + 518.1 2245.1

Value-in-use pricing

Going conservative, we will consider 4 Zink servers equivalent to 2 Tronn servers.

1 laborer can cater to 40 Tronn servers. Hence, for each server, we need 1/40 laborer or (1/40) *80000 =
$2000.

(figures in $) 4 Zink servers 2 Tronn servers Savings

Price of servers 6800 4000 3400
Electricity charges 1000 500 500
Software license costs 3000 1500 1500
Labour costs 8000 4000 4000
Total costs incurred 12000 6000 6000
Savings due to 50-50
cost sharing in Tronn 0 3000 -
server

Therefore, for 2 Tronn servers, savings is 3000, which is the value that will be derived from use of Tronn
servers. Hence, price for 2 Tronn servers is: 4000 (initial cost) + 3000 (value) = $7000

Anticipate the reactions to your recommendation and formulate plans to address them, for the
following individuals/groups:

Mazter: Mazter is a veteran in Atlantic Computers who believes in giving away software free of cost.
However, value-in-use pricing method will require PESA to be charged. Mazter will be disappointed with
this idea of charging extra for PESA. Moreover, he had opined that businesses generally use one basic
server for one function. If we suggest use of one server for multiple functions (i.e. 2 Tronn servers to do
work of 4 Zink servers), Mazter may get apprehensive of the plan.

Mazter will need to be convinced by establishing the cost-revenue model and showing how the two ideas
can be married to derive greater value out of the value-in-use method for Tronn and PESA. An
explanation on how extra charge for PESA will help in factoring the cost of R&D should work.

Cadena and salesforce: The salesforce has 70% of earnings as fixed salary and 30% as commission. A
surge in the pricing of Tronn servers will certainly lead to an uncertain dip in sales of the server. This can
intimidate Cadena and the salesforce team as reduction in sales can translate to reduction in their variable
earnings.

However, they will have to be persuaded about the possible increase in sales in the long-term. If
customers derive value out Tronn servers and if it helps them save money, then it will lead to positive
word-of-mouth, which can help in increasing sales later and thus, earning for Cadena and salesforce.
Sales team has to be fully convinced of the idea and must be trained to explain well to customers the
increase in prices and the increase in value derivable.

Senior management at Atlantic: The senior management will have reservations over the change in
pricing methods and a shift from the status-quo methods. Jowers will have to explain how value-in-use
pricing method will result in the highest revenue and profits for the organization, even if it means the
different departments will take time to sync in with the new method.

Customers: Customers will certainly be taken aback initially by the increase in price of Tronn servers. It
may even lead to attrition of customers to some extent and change in brand loyalty.

However, positioning in required for tackling this issue. Jowers must work closely with the marketing
team and help them to explain the public how Tronn with PESA will lead to reduction of number of
required servers for the same load of tasks. Atlantic Computers must target customers in the web hosting
and file sharing segments, since they will derive the maximum value out of PESA’s power. If customers
are convinced that PESA and Tronn are helping them save money, then customer retention will happen.
However, this may not work with small businesses, who need less than 4 servers for their business
operations.

Competition (Ontario): Ontario Zink may not respond initially. An increase of prices on rival’s side can
make Ontario delighted about the advantage they have over Atlantic Computers. However, if customers
are able to derive value out of Tronn and PESA, then Ontario Zink may reduce its prices to fight the
competition. It may even carry out R&D activities to fight PESA.

Compare the top line revenue implications of alternative pricing strategies to the firm over the next
three years?

The price of Tronn server which can be charged from customers for different pricing models is as
follows:
  Traditional method: $1538
 2 Tronn for 4 Zink: $3400
 Cost-plus method: $2245
 Value-in-use: $7000

For the next three years, we need to have a pricing model that factors in all the costs incurred by Atlantic
Computers and provides stability to the cost structure. Atlantic Computers must use the Value-in-use
pricing method for the following reasons.

 By showing the monetary benefits that customers will derive out of Tronn servers, Atlantic
Computers will be able to show more value to customers.
 Pricing must not be based on cost of Zink servers. In case, Ontario Zink servers reduce their cost,
then Tronn servers will also see a reduction costs. The price war may lead to losses for Atlantic
Computers as a low price may not be able to factor the cost of R&D on PESA.
 If sales increase, then Atlantic Computers will also gain by 50-50 profit sharing.

A comparison (assuming sales of 21180 servers) is as follows:

Pricing method Revenue Cost Profit

Traditional/ Status-quo 42,360,0009 32,574,840 9,785,160
Competition based 72,012,000 32,574,840 39,473,160
Cost-plus 47,549,100 32,574,840 14,974,260
Value-in-use 148,260,000 32,574,840 115,685,160

It is clear that value-in-use pricing method will help Atlantic Computers maximize its profits.