MARKETING MANAGEMENT I

ATLANTIC COMPUTERS
A BUNDLE OF PRICING OPTIONS


CASE ANALYSIS NOTE (CAN)





UNDER THE GUIDANCE OF
DR. JOFFI THOMAS
(IIM, KOZHIKODE)



GROUP 05

ANAMIKA CHAUDHARY (PGP/17/255)
DEEKSHA S. (PGP/17/265)
MANOTOSH CHOWDHURY (PGP/17/275)
PRAMA MUKHERJEE (PGP/17/285)
SHAKUN (PGP/17/295)
ASHISH RASTOGI (FPM07/05/O)

(SECTION E)



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 makes a conservative estimate
that two Tronn servers plays PESA equals the performance of four Ontario Zink servers.)


Calculating the price of Tronn server with PESA software tool (Atlantic bundle) for all of the 4
available options:

Charging for only the Tronn server hardware and giving away the PESA software tool
for free
Traditionally, the focus of Atlantic had always been hardware and the software was usually
provided free to the customers. So, going by convention, the price of the basic server was
established at $2,000 by Chris Matzer, head of the server division.
But this would lead to Atlantic bearing a huge sunk cost comprising of R&D costs of
developing PESA amounting to $2,000,000. Giving away PESA for free might also lead to
customers perceiving it to be of low value.

Charging a price equal to the price of 4 Ontario Zink servers (Competitive pricing)
Tronn server + PESA can be priced in competition to its direct competitor product Zink.
1 Tronn server loaded with PESA can be a substitute for 4 Zink servers.
Price of 1 Zink server = $1,700
Price of 1 Atlantic bundle = 4 * $1,700 = $ 6,800
In accordance with Chris Matzers conservative approach, 2 Tronn servers with PESA
software tool are equivalent to 4 Zink servers.
Price of 1 Atlantic bundle in this case = 2 * $1,700 = $ 3,400
The price $6,800 is quite high as compared to that of a Zink server and customers might have
to be explained the long term benefits of the higher investment that they will make.
This might also lead to price wars. Ontarios operational efficiency is very high, so if they
reduce the price of Zink further, Atlantic may find it tough to cope up with it.

Cost-plus pricing approach
Cost of each Tronn server (hardware only) = $ 1,538
Expected sales in 3 years are given as 4% in 2001, 9% in 2002 and 14% in 2003.
Expected sales (using Exhibit 1) = 4% of 50,000 + 9% of 70,000 + 14% of 92,000
= 21,180
Expected installations of PESA = 50% of Tronn server sales
= 50% of 21,180 = 10,590
R & D cost of PESA (Exhibit 3) = $2,000,000
Per unit cost of PESA installation = $2,000,000/10590 = $189
Total cost of Atlantic bundle = $1,538 + $189 = $1,727
Per unit price of Atlantic bundle assuming a 30% markup above costs = 1,727 + 0.3 * 1727
= $ 2,245.1

Value-in-use pricing method

Assuming that there is a 50-50 sharing of the savings gain with the customer, the price is
calculated as follows for 2 cases:

OPTION 1 (AS PER BETA TEST) TRONN(1 SERVER) ZINK (4 SERVERS)
PRICE ($) 2000 6800 (=1700*4)
ELECTRICITY 250 1000 (=250*4)
COST OF S/W LICENSES 750 3000 (=750*4)
SERVER ADMINS ANNUAL SALARY 80000 80000
TOTAL COST OF OWNERSHIP 83000 90800
SAVINGS IN CASE OF TRONN 7800
PRICE CHARGED (ACTUAL+50% SAVINGS) 2000+ 50% of 7800 5900

Cost to customer = Price of Atlantic Bundle = $5,900

OPTION 2 (CONSERVATIVE ESTIMATE) TRONN(2 SERVERS) ZINK (4 SERVERS)
PRICE ($) 4000 (=2000*2) 6800 (=1700*4)
ELECTRICITY 500 (=250*2) 1000 (=250*4)
COST OF S/W LICENSES 1500 (=750*2) 3000 (=750*4)
SERVER ADMINS ANNUAL SALARY 80000 80000
TOTAL COST OF OWNERSHIP 86000 90800
SAVINGS IN CASE OF TRONN 4800
PRICE CHARGED (ACTUAL+50% SAVINGS) 4000+ 50% of 4800 6400

Cost to customer = Price of 2 Atlantic Bundles = $6,400

We suggest a value-in-use pricing method to calculate the price to be charged to Daytraderjournal.com.
The company needs basic web servers to host its new website where day traders cab review articles and
relevant trading information.

As detailed in Exhibit 4 of the case, the top three buying criteria for basic server purchase include:
Minimizing acquisition cost
Minimizing possession cost (i.e. total cost of ownership)
Allow the website to process many information requests.

The derivation of price using value-in-use pricing shows that it is beneficial for Daytraderjournal.com to
buy from Atlantic Computers as compared to Ontario on all the counts which forms their decision criteria
as stated below:
A. Low acquisition cost = $4,000 (2 Atlantic bundles)
B. Low possession cost = $6,400 (2 Atlantic bundles)
C. PESA is designed to make frequently requested information extremely accessible











2. 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 Zinks Sr. Management)

A. Probable reactions to our recommendations could be:

Matzer
Chris Matzer, the head of server division seemed to stress more on hardware than on
software tools. So he might not be much in favour of using the value-in-use approach to
set the price over the traditional approach of giving away PESA software free with
Tronn server.
He will have to be convinced that PESAs impact on the performance of the server will
be positive to a very large extent and giving it free might lead to it being perceived as a
low value product. So it should not be handled the same way as the software tools had
been dealt with in the past.

Cadena & salesforce
The sales force compensation structure was roughly 70% salary and a 30% commission.
Competitive pricing would fetch the sales force more commission than value-in-use
pricing. So they might not be willing to accept the implementation of value-in-use
pricing method.
Cadena and his sales force will have to be convinced to accept this pricing strategy for
the benefits it will bring to Atlantic Computers as well as the perceived benefits that the
customer will gain. The sales people will also have to be imparted special training to
sell the server with the software tool by emphasizing on the value of the server to
customer, impact on performance of server by installing PESA, the low acquisition and
possession costs and the excellent after-sales service for customers.

Sr. management at Atlantic
The Senior Management at Atlantic will ask for a justification due to the increase in
pricing of the TRONN server combined with the PESA software package as compared
to only the Tronn server. This will be the primary concern as the original focus of the
Management traditionally being Hardware, they are used to giving the software free up
until now.
The huge improvements in performance of the Atlantic Bundle will help it perform
equivalent to double the units of its Competing Ontario's Zink. Thus, on the basis of the
chosen value-in-use pricing, this will result to huge savings in electricity and other
running costs which will be equally shared by the company and the customers. The
performance improvement testing reports will back up our pricing decision into a win-
win situation for both the entities.

Customers:-
Customers will be welcoming towards the introduction of a Basic level Server product
from a company of the legacy of Atlantic computers which is already well established in
the High Performance Server category with its product Radia. But the increase in price
against the competitor Ontario's Zink might create initial apprehensions in the minds of
the customers.
But the Beta test results clearly demonstrate the huge improvements in speed and
performance of the servers which results in 4 Zink servers to be satisfactorily
substituted by one Atlantic Bundle. Although the initial price of four ZINK servers is
comparable to the initial price of two Atlantic Bundles (conservative estimate), but the
usage costs of the two clearly place the Atlantic Bundle at a much advantageous
position and which when positioned in the minds of the customers will be a huge
advantage to the sales.

Competition (Ontario Zinks Sr. management)
The current revenue market share of Zink is 50% in the basic server market. Tronns
market share estimated for 2001 is 4%, for 2002 is 9% and for 2003 is 14%. So, there
would be no immediate reaction from Zinks senior management but as the market
share of Tronn would increase, Ontario may react by reducing their prices as their
operational efficiency is high and so they can afford to reduce prices to gain back their
market share. In such a scenario, Atlantic may have to compromise on the 50-50 profit
sharing ratio to offer a better price to customers.

3. Compare the topline revenue implications of alternative pricing strategies to the firm over next
three years?

Based on the profits and revenue calculated, we suggest the usage of value-in-use pricing strategy. The
reasons are as follows:
The use of Tronn along with PESA software, on a conservative estimate, can be equaled as two
Tronn servers being equivalent to 4 Zink servers. The value-in-use pricing strategy prices
the server at a price that gives more value than Zink server
The Ontario computers have a market share of 50% and pricing it using this strategy will
ensure a steady increase in the market share of Atlantic computers at the cost of Ontario
losing its share.
Pricing it using competitive pricing strategy may increase the profit obtained by 10% but
in the long run pricing it lower will ensure a better probability of capturing Ontario
computers market share
The revenue implications of all the alternative pricing strategy over the next three years have
been computed and compared as follows:-

1.STATUS-QUO PRICING STRATEGY

2001 2002 2003 TOTAL
Number of servers sold 2000 6300 12880

Cost per server 1538 1538 1538

Selling price of server 2000 2000 2000

Total revenue 4000000 12600000 25760000

Total selling costs 3076000 9689400 19809440

Profit before R&D costs 924000 2910600 5950560

Total profit for three years 9785160
R&D costs incurred 2000000
GROSS PROFIT FOR THREE YEARS 7785160



2. COMPETITIVE PRICING STRATEGY

2001 2002 2003 total
Number of servers sold with PESA 1000 3150 6440

Number of servers sold without PESA 1000 3150 6440

Selling price of servers without PESA 2000 2000 2000

Selling price of servers with PESA 3400 3400 3400

Revenue from sales of servers without PESA 2000000 6300000 12880000 21180000
Revenue from sales of servers with PESA 3400000 10710000 21896000 36006000
Total Revenue 57186000
Cost per server(only hardware) 1538 1538 1538

Total selling costs incurred 3076000 9689400 19809440 32574840
Total profit for three years 24611160
R&D costs incurred 2000000
Gross profit for three years 22611160



3.COST-PLUS APPROACH

2001 2002 2003 TOTAL
Number of servers sold with PESA 1000 3150 6440

Number of servers sold without PESA 1000 3150 6440

Selling price of servers without PESA 2000 2000 2000

Selling price of servers with PESA 2245 2245 2245

Revenue from sales of servers without PESA 2000000 6300000 12880000 21180000
Revenue from sales of servers with PESA 2245000 7071750 14457800 23774550
Total Revenue 44954550
Cost per server(only hardware) 1538 1538 1538

Total selling costs incurred 3076000 9689400 19809440 32574840
Total profit for three years 12379710
R&D costs incurred 2000000
Gross profit for three years 10379710



4.VALUE-IN-USE PRICING

2001 2002 2003 TOTAL
Number of servers sold with PESA 1000 3150 6440

Number of servers sold without PESA 1000 3150 6440

Selling price of servers without PESA 2000 2000 2000

Selling price of servers with PESA 3200 3200 3200

Revenue from sales of servers without PESA 2000000 6300000 12880000 21180000
Revenue from sales of servers with PESA 3200000 10080000 20608000 33888000
Total Revenue 55068000
Cost per server(only hardware) 1538 1538 1538

Total selling costs incurred 3076000 9689400 19809440 32574840
Total profit for three years 22493160
R&D costs incurred 2000000
Gross profit for three years 20493160



PROFIT OBTAINED FOR VARIOUS PRICING STRATEGIES

1.STATUS QUO PRICING STRATEGY 7785160

2.COMPETITIVE PRICING STRATEGY 22611160

3.COST-PLUS APPROACH PRICING STRATEGY 10379710

4.VALUE-IN-USE PRICING STRATEGY 20493160