8/10/2019 Case Analysis - Atlantic Computer

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Company Background:

Atlantic Computer, Inc. is the largest player in overall computer industry. It has been

competing in the server market for 30 years by selling its high-end performance servers,

called Radia, to large enterprise customers. It has reputation of providing top-notch, highly

reliable products with high quality, responsive post-sales assistance. Its strategy, based on

customer intimacy and product differentiation, has helped it capture 20% of the revenue

market share in high-end servers.

Current problem:

With the growth of the internet, it has realised the need for competing in a newer segment of

Basic Servers with Atlantic Bundle (Tronn + PESA). The Tronn was developed mainly for

the emerging US market. PESA (Performance Enhancing Server Accelerator) enhances the

performance of Tronn by four times. It has decided to introduce the Basic server into the

market by 2000. Jowers is given the responsibility of developing the pricing strategy for

Atlantic Bundle. He has the following tasks in hand:

Choose a pricing strategy among Status Quo, Competition-based, Cost-Plus and

Value-in-Use

Get the Sales force charge for PESA Anticipate the main competitors (Ontario Computer) likely reaction

Factors influencing pricing strategy for the Atlantic Bundle:

Server Division at Atlantic Computers primarily focused on hardware and had placed

little emphasis on developing software tools

Historically, sales force have given software tools to customers for free

How customers perceive PESA would be a significant factor in winning deals Traditionally relied upon cost-plus pricing analysis for determination of prices of

servers

Careful consideration of customer segments who will benefit from PESA software,

like customers in web server and file sharing applications

Prospective customers should be convinced about the first(purchase of fewer servers)

and second order savings (lower electricity, software license and labour costs)

8/10/2019 Case Analysis - Atlantic Computer

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Status Quo Pricing:

Charge a price only for the hardware and provide the PESA software for free

Cost of Tronn Server $ 2,000.00

Cost of PESA Software $ 0

Total Price $ 2,000.00

Cost of two Tronn servers $ 4,000

Cost of four Zink Servers $ 6,800

Pros:

Efficient software for free will attract more buyers

It is in sync with companies traditions of giving free software

It does not expect change in customer buying behaviour This will provide the easiest means to convince Matzer

Cons:

Will lose the intangible value of the softwares competency

The Company would incur a sunk cost of $ 2,000,000 as part of development costs for

PESA

Competitive-Based Pricing:

One Tronn would be priced at the same rate as two Zinks

Price of 4 Zink Servers $ 6,800.00

Price of 2 Tronn Server loaded with PESA Software $ 6,800.00

Price of Tronn Server loaded with PESA Software $ 3,400.00

Pros:

High margins due to a high mark-up

Cons:

High price may be viewed negatively by customers

Reduction in number of servers increases risk of downtime

Cost- Plus Pricing:

Cost of PESA software + Basic Tronn Server

Year No.of units of basic servers sold No. of Tronn Servers*

2001 50000 2000

2002 70000 6300

2003 92000 12880*Atlantics share is 4% in 2001, 9% in 2002 and 14% in 2003

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Total No. of Tronn Servers Sold From 2001-03 21180

Total No. of Tronn Servers with PESA attached(50% attach rate) 10590

Cost of development per Tronn server with PESA($2000000/10590) $ 189

Cost per Tronn Server $ 1,538

Total Cost of Tronn Server with PESA attached $ 1,727

Price of the server (Cost + 30% mark up) $ 2,245

Pros:

Profitable if enough sales can be achieved

High Market share in terms of value

Pricing strategy does not require any alterations

Cons:

Customers may view the high price negatively

Not a customer focussed option.

Value-in-Use Pricing:

Considers savings that a customer would make by purchasing the Tronn server

Particulars Amount

Savings : Purchase 2 Tronn servers instead of 4 Zink Servers $ 2,800.00

Savings: Electricity $ 500.00

Savings: Additional licensing fees $ 1,500.00Savings: Labour Charges $ 4,000.00

Total Savings for Two Tronn Servers $ 8,800.00

Total Savings for one Tronn Server $ 4,400.00

Savings for the customer (50% of total savings) $ 2,200.00

Total Price (Price of 1 Tronn Server + Savings) $ 6,400.00

Total Price (Price of 1 Tronn Server + 50% Savings) $ 4,200.00

Pros:

More customer focussed as pricing can be justified Benefit- Price ratio can be viewed as high. This could make the product a hit

Cons:

Sales force requires training that would cost time and money

Market share will not be maximized

8/10/2019 Case Analysis - Atlantic Computer

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Recommendations:

1. Atlantic Computers Inc. should go in for a value-in use pricing strategy. This would

maximise their profit, still costing less than competitors product.

2. Atlantic Computers should target clients who do a large amount of web hosting. This is

because they will be the mostly benefitted from the Tronn with PESA enhancing

performance 4 times.

3. Customers may not respond well to the sudden change of paying for software, when

they have been used to receiving it free on purchase of hardware. In order to counter this

tendency, Atlantic will have to emphasize on the benefit of using the PESA and will have

to run live demonstrations to prove its worth to its customers.

4. Atlantic will have to convince their sales people to charge for PESA. Since they derive

their 30% commission from the amount of sales they make, they would try for higher

sales. But they have to be trained first through role-playing exercises so that they can

convince the customer of their mutual savings.

5. Ontario Computer can respond by lowering the margin till $1214(cost per server).

However, Atlantic would have advantage still with value-in-use pricing.