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

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 Zink's Sr. Management)

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

Ans 1)

Jowers should charge $3,500 per unit of Atlantic Bundle ($2000 for server + $1500 for PESA).
Benefits of round1 and round 2 are given below:
o Round-1 : At $3500 per unit of Atlantic Bundle, customer is paying $200 more than
buying 4 Zink server ($1700 each). But this additional $200 will help customer to save
significant amount on operational cost.
o Round-2 : Per details in the exhibit-1, each additional dollar spent on acquiring Atlantic
Bundle will save $29 a year on operational activities. This is significant long run saving.
So at the end, DayTraderJournal.com will save $5800 from this transaction. Exhibit-2 (last
page) shows the calculation of value PESA will create for DayTraderJournal.com by saving cost
for operational activities.
Also, by charging $3500 per unit of Atlantic Bundle, Atlantic Computer will be able to capture
part of the value that will be created due to PESA tool. The calculation total value created and
share of it used to determine price of PESA are explained in exhibit-2.

Ans 2)

A. Matzer

Matzer is not going to like $3500/unit of Atlantic Bundle. As details provided in the case, Matzer
has done thorough analysis of potential of market for basic servers. The demand for basis
servers is going to increase rapidly in coming years and it is key for Atlantic Computer to start
penetrating in this market in order to increase overall revenue. With this view, he decided to
develop a new product line in the basic server segment. Now, Ontario Computer is dominating
this market and selling servers that best serves customers' need at lower price is the main
reason behind their success.
So Matzer would be more inclined towards penetrating market with aggressive pricing and this
why he will not agree with pricing Atlantic Bundle for $3500/unit.

B. Cadena & salesforce

As Cadena's sales force salary structure was 70% salary and 30% commission (assuming that
commission is based on the sales and not on number of units), they would be fine to sell Atlantic
Bundle for $3500/unit. Selling bundle at recommended price will earn them almost double
commission compared to selling the bundle at $2000/unit.

C. Sr. Management at Atlantic

Ontario's senior management is not expected to reduce the price of Zink server as to give more
of round-1 benefits (acquisition cost savings) because reducing price will impact their
profitability for short term without gaining much of benefits (in terms of greater market share)
at long run. At current price of $1700 per Zink server, Ontario is earning at 40% of profit margin.
Suppose that to match with Atlantic Computer's profit margin for Tron server (without PESA) of
30%, Ontario reduces the price of Zink server by $100 per server; it will not be able to create
significant value in terms of lower acquisition cost as compared to that with Atlantic Bundle.
Even after reducing the price of Zink server, due to the fact that number of servers required for
meeting processing needs is not going to change, operational costs will remain higher compared
to that with Atlantic Bundle. As shown in exhibit-4, using the data of DayTraderJournal.com, with
Atlantic Bundle round-2 benefits (savings on possession cost) will still be significant ($5400 per
year) comparing the operational cost of number of required Zink servers.

So per game theory, the most likely action that Ontario Zink's senior management is expected to
take is finding ways to enhance performance of the server to bridge the gap between number of
servers required to achieve required level of performance. Also, at short run they are expected
to react with aggressive marketing campaign on the basis of lower price and related acquisition
benefits.

D. Customers

At first sight customers would not like recommended pricing for Atlantic Bundle as
 They would find the per server cost for Atlantic Bundle much higher (double) than
that of Zink.
 Being unaware of the capabilities of PESA, they would not prefer to pay for the tool.
The model that we used to determine price for DayTraderJournal.com (exhibit-2) will be a
useful tool to showcase the overall value created by Atlantic Bundle in terms of savings on
operational activities throughout the lifetime of the server. Customers will not see much
benefit with acquisition cost saving (round-1) but PESA will give significant benefits by saving
on possession cost (round-2). Showcasing customers that server with PESA loaded onto it will
cut down the number of servers required to server the purpose by half and this will be the
source of cost saving will help customers to realize the benefits of purchasing Atlantic Bundle
and using it for long term.

Ans 3)

As shown in the exhibit-3, with status quo pricing, Atlantic Computer would be foregoing big chunk
of money by giving PESA away for free. Moreover, thinking through the big picture view of overall
industry, Atlantic Bundle is the product that could change (reduce) the demand (in terms of number
of servers in the market. So lower price can give Atlantic Computer short term benefits of capturing
higher market share but decrease in demand will impact both revenue and profitability at long run
and hence setting up right price for Atlantic Bundle is very important.

Exhibit-1: Operational benefits due to PESA

Total Operational Savings


$6,000.00
(one year)
Value Sharing 50%
PESA - Price/unit $1,500.00
Tronn - Price/server $2,000.00
Atlantic Bundle -
$3,500.00
Price/unit
Excess Price Compared to
$200.00
Zink Servers
Savings/excess$ $29.00
Savings/$ of PESA $3.87

Exhibit–2: Recommended pricing of Atlantic Bundle

Acquisition Cost Possession Cost


# of
Servers Per Electricit
Total Licenses Admin Total
Server y
$3,500.0 $7,000.0 $1,500.0 $4,000.0
Tronn 2 $500.00 $6,000.00
0 0 0 0
$1,700.0 $6,800.0 $1,000.0 $3,000.0 $8,000.0 $12,000.0
Zink 4
0 0 0 0 0 0
Savings -$200.00 $6,000.00
Total
$5,800.00
Savings
Exhibit-3: Revenue comparison of status-quo pricing with other pricing options

Expected Revenue – Atlantic Bundle - Status Quo Pricing


2001 2002 2003 Total
Expected
1000 3150 6440 10590
Sales
Price/unit $2,000.00 $2,000.00
Status quo $2,000,000.00 $6,300,000.00 $12,880,000.00 $21,180,000.00
Forgone Revenue – Atlantic Bundle
Value-in $1,500,000.00 $4,725,000.00 $9,660,000.00 $15,885,000.00
Cost Plus $245,514.64 $773,371.10 $1,581,114.26 $2,600,000.00
Matching
$1,400,000.00 $4,410,000.00 $9,016,000.00 $14,826,000.00
Zink Price

Exhibit-4: Acquisition and possession cost benefits for DayTraderJournal.com with reduced price of
Zink server

Acquisition Cost Possession Cost


# of
Servers Per Electricit
Total Licenses Admin Total
Server y
$3,500.0 $7,000.0 $1,500.0 $4,000.0
Tronn 2 $500.00 $6,000.00
0 0 0 0
$1,600.0 $6,400.0 $1,000.0 $3,000.0 $8,000.0 $12,000.0
Zink 4
0 0 0 0 0 0
Savings -$600.00 $6,000.00
Total
$5,400.00
Savings