The De La Salle University

Graduate School of Business

Atlantic Computer Paper

A Case Study Analysis Presented to: Mr. Reynaldo Lugtu

Presented by: Kristine Dianne Co Woo Joong Kim Angelica Joi Guerra Bryan Virtudes Rita Reyes

June 15, 2013 1

I.

CASE SUMMARY

Jason Jowers, who just finished his MBA is new at Atlantic Computers. He gets his big break as an opportunity opens up for him, hes tasked to launch Atlantics newest server: The Atlantic Bundle. The Atlantic Bundle is a new product consisting of the new Tronn server and the PESA software tool which will compete directly with Ontarios Zink in the Basic Server Market. Although Atlantic Computer has established strong market leadership in High Performance Servers segment, it has meanwhile trailed the market leader Ontario in the basic server segment. The Atlantic Bundle is a product with high potential to beat Ontarios Zink given that is 4 times faster than its competitor. Jason is tasked to create a pricing strategy that can be used to launch the Atlantic Bundle in the market in the next two weeks during the SME Trade Show.

II.

POINT OF VIEW

The point of view to be taken in this case is Jason Jowers because of the following reasons: 1. He is the proponent of the project and will present and lobby his recommendation to his colleagues. 2. He is tasked to launch the new server, Atlantic Bundle and decide on the pricing strategy.

III.

STATEMENT OF THE PROBLEM

What pricing strategy should Atlantic Computer use in order to help its new product, Atlantic Bundle, to be profitable in the market and take away market share from its competitors?

IV.

STATEMENT OF OBJECTIVES
1. To create the best pricing strategy for the Atlantic Bundle, ensuring it will be profitable and will be aligned with the companys strategy of entering the basic server market. 2. To gain market share in the basic server market this is projected to grow by 36% in the next 2 years. 3. To claim market share from Ontario Computers Zinc which is currently in 50% in basic server market.

V.

AREAS OF CONSIDERATION
Atlantic computer leads the high performance server market with their product, Radia which has 20% market share. Their main competitor, Ontario, leads the basic server market with 50% market share with their product Zink. 2

The basic server market is seen to grow at a faster rate than high performance servers in the coming years. The Atlantic Bundle which consists of the Tronn (basic server) and PESA (software) are made specifically to enter the emerging market of basic servers. Tronn is at par with Zink in performance but when used with the PESA, 1 Tronn server equals the capability of 4 basic servers. Atlantics success comes from providing top notch highly reliable products, reputation for providing high quality, responsive post-sales assistance based on customer intimacy and product differentiation while Ontario provides a flexible and innovative supply chain strategy allowing them to lower their costs Atlantic and other competitors traditionally focused on hardware, software were usually given out for free along with the hardware

VI.

ASSUMPTIONS
1. Clients need 4 basic servers to complete required outputs 2. Atlantic wants a 50-50 sharing of the savings gain with the customer

VII.

FRAMEWORK

ECONOMIC VALUE This framework helps determine the economic value of a product or service relative to a competitor (reference value). Total economic value is assessed by adding the positive differentiation (savings/unique value) and subtracting negative differentiation value (unique costs) of the offering.

VIII.

ALTERNATIVE COURSES OF ACTION (ACA)

1. Cost-Plus pricing (cost of server and innovation of PESA with mark-up) The traditional strategy used by Atlantic and the server industry for its product lines is cost-plus pricing. Pros: o Atlantic will be able to get back innovation costs of the Atlantic Bundle Cons: o Sales may not pick up if the price is too high (Tronn + PESA innovation cost) for the customers perceived value o Value for customer may be higher than cost plus and Atlantic will miss out on the opportunity of maximizing profits 2. Share driven pricing (price of Atlantic Bundle is at par with price of Zink, free PESA) It is one of Atlantics main objectives to penetrate the emerging market of basic servers. As a challenger vs. a market leader with low prices, Atlantic may have to benchmark or lower prices to be able to compete. Pros: o Atlantic will be able to reach market share objectives and will be able to penetrate the basic server market Cons: o Profitability of the Atlantic Bundle and the whole company may suffer o Atlantic will not be able to get back innovation and developmental costs o Atlantic may not be able to deliver the same quality for post sales assistance as they do now for other product lines 3. Value Based pricing (Atlantic Bundle will be priced at a premium because of PESA) This strategy looks at how the customer perceives the value of a product and how they think it should be priced Pros: o Atlantic will be able to get back innovation costs of the Atlantic Bundle o Atlantic Bundle will be priced the way customers perceive the value (profit maximization) Cons: o Product offering will be more expensive than market leader

IX.

RECOMMENDATION

We recommend using value based pricing because the Atlantic Bundle is a highly specialized innovation with different capabilities as the competitor. We also recommend using value based market segmentation Tronn has a different value for the different segments. We can offer the Tronn by itself and one with PESA. This will be strategic because well have a basic server to answer basic needs of SMEs, and as an alternative well have a moderately priced but relatively high performance 4

basic server Tronn + PESA and lastly, Radia for the high performance premium server. This way, well ensure that all segments are covered. We recommend the following pricing schemes below: Segment 1: Basic Needs Market Tronn (without PESA) at $2,000 Segment 2: Tronn + PESA Atlantic Internal Performance Testing Results Tronn w/ PESA Tronn w/out PESA File Sharing 812 404 Web Servers 2,222 542 Cost Information of Servers Price per server Cost per server Atlantic Tronn Ontario Zink $2,000 $1,700 $1,538 $1,214

Total PESA Development Cost $2,000,000

We are comparing 2 Tronn servers +PESA with 4 Zink servers because the case stated that because Matzer and his colleagues were quite conservative, Jowers decided that it would be best to compare two basic servers loaded with the PESA software tool versus four basic servers. Cost Comparison Zink (4 Servers) 2 Tronns w/ PESA Server Cost $6,800 $4,000 License $3,000 $1500 Labor $2,000* $2,000* Electricity $1,000 $500 Total: $12,800 $8,000 Savings: $4,800 *Labor cost is not multiplied by 4 as administrator is fixed regardless of number of services not exceeding 40. Apply the 50-50 sharing of savings gained with the customer. Hence, =$4,800/2 =$2,400 Price of Tronn with PESA = server price + 50-50 sharing of gained service $2,000 + $2,400 SUGGESTED RETAIL PRICE= $4,400

Monetary Value Estimation for Atlantic Bundle Savings on License = Total Positive $1,500 Differentiation Savings on Electricity = Value = $2,000 $500 Annually Reference: Zink price Total Reference per four servers = Value = $6,800 $6,800

Total Economic Value = $8,800

Differentiation Value Based on needs analysis of different customers, low acquisition and possession costs are important to them and this will be met with the suggested price above. The customer will also enjoy a price lower than total economic value with a savings of $2,400 It is important that Atlantic Computer continually improve and offer better services to its customers. This includes providing additional features such as flexible payment terms through a three year interest free payment, 24/7 customer support for all bundles purchased, warranties, etc.

X.

ACTION PLAN

As a next step, Atlantic should train their sales people on communicating a clear value story. They need to highlight 6 aspects such as lower acquisition cost--$4,400 instead of $6,800; customers save $2000 possession cost annually, 24/7 after sales customer support, flexible payments, 2 year warranty, and first in industry high performance server in the basic server segment. To support this, Atlantic should be able to provide flexible payment scheme of 1 year for each of their server sold and an extended 2 year warranty for all its hardware and software as it is proven that increasing warranty can help increase the customers willingness to pay. Atlantic should also look at their distribution model and plan to incorporate an online sales method to maximize opportunity to cater to more customers, and also to lower cost on sales people and improve productivity. REFERENCES Nagle, T., Hogan, J., & Zale, J. (2011). The Strategy and Tactics of Pricing (5th edition). New Jersey: Prentice Hall. 6