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Atlantic Computer A Bundle of Pricing Options - Case

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Asset Pricing I (Harvard University)

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12/15/2020 Atlantic Computer: A Bundle of Pricing Options - Case Solution

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Atlantic Computer: A Bundle of Pricing

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Atlantic Computer is an outstanding player in the high-end server market. It has discovered a new
venture in the server segment and developed Tronn to answer the needs of the segment. With the use
of PESA or the "Performance Enhancing Server Accelerator," Tronn is able to function faster than its
normal speed. Atlantic Computer is faced with the question on pricing Tronn and PESA. It does not
merely considers cost-plus, competition-based, and status-quo pricing but includes value-in-use
pricing to come up with the appropriate but optimum cost of pricing.

NEERAJ BHARADWAJ; JOHN B. GORDON

HARVARD BUSINESS REVIEW (2078-PDF-ENG)
MAY 28, 2007

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12/15/2020 Atlantic Computer: A Bundle of Pricing Options - Case Solution

Case study write up including:

a definition of the problem,
detailed analysis,
economic value calculation,
a F-B-V analysis,
a value-based pricing analysis,
and recommendations (pricing strategy).

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Case answers for Atlantic Computer: A Bundle of Pricing Options

This case solution includes an Excel file with calculations.

Please scroll down to the bottom of this post to download the additional Excel spreadsheet!

Atlantic Computers is a manufacturer of servers and high-tech products that operates in an industry with two
market segments1: the traditional, where Atlantic leads with their premier product, Radia, which represents a
sustained 20% market share for the past 30 years, and the basic server market segment.

The basic server market is a fast-growing market currently dominated by Ontario, with a market share of 50%
thanks to their Zink server. Atlantic wants to enter and lead this market segment with their new server Tronn.
Tronn2 is a competitive option, and it could dominate this market if it were sold in a bundle with PESA2 tool. PESA

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12/15/2020 Atlantic Computer: A Bundle of Pricing Options - Case Solution

is the software tool also created by Atlantic that enhanced the performance of the Tronn server, by accelerating its
speed by four times. By selling Tronn and PESA together, Atlantic will outcome Ontario and their server Zink by
offering an Economic Value Estimation of $23,100 per bundle3. PESA and Tronn have other advantages, aside from
the enhancement of the server speed: Customers will need less server units reducing not only their costs but also
their office spaces, the electricity charges will be less as well, and labor costs will also be reduced since customers
will need a proportionally direct number of employees to servers. Finally, clients, especially in web server and file
sharing applications segments, will gain accuracy by using PESA software tool.

The main issue that Atlantic Computers is currently facing is to present the optimum price for the “Atlantic
bundle”, this is one Tronn server with PESA software tool. Atlantic will be able to achieve their goal by analyzing
four strategic scenarios4, and by developing the optimum pricing strategy. There are other associated problems
such as what strategy to follow to prevent the reaction of the competitor, Ontario, etc. that are not required in this
paper.

As previously mentioned, Ontario Computer, Inc. is the main competitor in this market. It has half of the basic
server market, 50%, conducts the majority of the sales online, and is proud to have a business model based on
operational excellence. This means that they have managed to create a competitive pricing advantage by
eliminating many non-value-added activities and cutting down the associated costs.

If Atlantic applies the Status quo pricing strategy, it means that it goes with the industry flow by charging only for
the hardware –the server– and giving the software –PESA tool– for free, the Pros are that this is the lowest priced
option; However, there are also Cons. These being that this option does not take into account all the costs
associated to the server, and it fails to capture the total value of the bundled-product since PESA is being given
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12/15/2020 Atlantic Computer: A Bundle of Pricing Options - Case Solution

away. With the application of this strategy, Atlantic will be charging $2,000 for Tronn and $0 for PESA, offering
the “Atlantic bundle” for $2,000 as sale price. The CM per unit will be $462, 5% less than Zink and the NPV of the
total CM after 3 years will be $1,396,064.87.

If Atlantic applies the Competition based strategy, it will charge the equivalent to four Zink servers sold by Ontario,
since one Tronn server with PESA works four times faster than one Zink server. The Pros are that this option would
deliver value in quality of performance and in cost savings. The main Con is that this is the priciest option and
customers might not see the added value. The sale price will be $6,800 and the CM, $5,262, over 90% more than
Zink. While the NPV of the total CM after 3 years will be $36,679,855.78, it will be very difficult to market as it will
be seen as a big loss one single time, probably, without seeing the value-in-use that Tronn+PESA add.

If Atlantic opts to implement the Cost-plus pricing strategy it will be offering a great deal for a lower price than the
competition based price, and it will ease the enforcement of “Atlantic bundle”. As a more remarkable Con, this
option only yields CM per unit of $707, and a NPV of the total CM after 3 years of $3,196,380.88, and it will be
challenging to keep the credibility of the offer up, since the difference in price from the status quo price to this
option is only $245/unit whereas the difference in value is $4,050/unit.

Finally, by implementing a value in use pricing strategy and using the price of one Zink server as a competitive
reference value, Atlantic is offering a positive differentiation value equal to $5,100 thanks to Tronn’s 4xSpeed and a
negative differentiation value equal to the cost of the software license, $750, since the industry has always given it
away for free. The price relative to the economic value will be $6,0503 yielding a CM per unit of $3,762, and a NPV
of the total CM after 3 years of $25,653,671.12.

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12/15/2020 Atlantic Computer: A Bundle of Pricing Options - Case Solution

Based on the analysis done, I would recommend Jowers to price the “Atlantic Bundle” in $6,050. While the most
practical and fair option might seem to apply the competition-based strategy, which would allow Atlantic to reduce
sales by 17% and maintain the profitability4, credibility within the customer would be unlikely to be sustainable.
Atlantic is better positioned by offering the customer a product whose true value can be quantified, expressed, and
justified by the sales force. This is $23,100 per bundle. Transparent communication is key to succeed in
the implementation of this pricing strategy, as well as it is leveraging the existing brand engagement. Buyers of
technology tend to be system 2*; Therefore, they will see the price fair once they learn the true economic value they
are getting.

Exhibit 1: Market segment data

Exhibit 2: F-B-V detailed analysis

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12/15/2020 Atlantic Computer: A Bundle of Pricing Options - Case Solution

Exhibit 3: Economic Value Estimation®

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12/15/2020 Atlantic Computer: A Bundle of Pricing Options - Case Solution

Exhibit 3: Economic Value Estimation® – Price Relative to Economic Value

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12/15/2020 Atlantic Computer: A Bundle of Pricing Options - Case Solution

Exhibit 4: Comparative table of the four strategic analysis: Pricing, CM, BE, NPV – 3 years.

Rate of Return assumed: 36%

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12/15/2020 Atlantic Computer: A Bundle of Pricing Options - Case Solution

Footnotes:

1 See exhibit 1: Market segments data.

2 See exhibit 2: F-B-V detailed analysis.
3 See exhibit 3: EVE analysis.
4 See exhibit 4: Comparative table of the four strategic analysis: pricing, CM, BE, NPV (3 years).
* Source: Dr. Gerald Smith. Pricing Strategy, Boston College. 2017.

Additional File:

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12/15/2020 Atlantic Computer: A Bundle of Pricing Options - Case Solution

Excel Spreadsheet. Download here.

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