Case: Atlantic Computer: A bundle of pricing options

1) What price should charge Jowers to DayTraderJournal.com for the

“Atlantic Bundle” (Tronn servers + TESA SW)?

Jowers should charge $4,500/machine for Tronn Servers with PESA. If he plans
on selling the servers alone without PESA, the status-quo pricing model is still
profitable and should be used at the $2,000. However, given the boost and cost
savings available for the consumer with PESA, being $4,500 alone (after 50/50
split is calculated), not inclusive of variable or fixed costs of production, an
upcharge of $2,500 for adding PESA is fair for both consumer and customer.
The calculations below show pricing considerations under each of the 4
approaches as well as justify the pricing suggested.

However, given that the company is hoping to bundle as many as possible, they
should also consider removing the option to purchase devise without PESA all
together. If this is not possible, considerations in branding the bundled and
unbundled product differently and marketing these to different segments (one to
Ontario’s low end, and another higher end), may be a wise decision.

1. Status quo pricing

Sales price = $2,000

Cost per server = $1,538
Profit per machine = $462

PESA Software development cost = $2,000,000

Cost per PESA = $188.86
Profit per machine after PESA = $273.14

Demand = 50,000 ($40/machine for PESA)

Specialty shift from hardware to software (incur additional sales team costs)

1 Tronn loaded with PESA = same level of performance as 4 basic servers

2. Competition based pricing = $1,700

Cost per server = $1,538.00
Cost per PESA = $188.86
Cost with PESA = $1726.86
Profit with PESA per machine = ($26.86)

Profit without PESA per machine = $162.00

2. Cost-plus pricing (used in the past) = $2,000/machine

Secondary cost savings: lower annual electricity charges, software license fees
and labor costs

Basic server segment (in units) =

2001 – 4% = 2000 units
2002 – 9% = 6300 units
2003 – 14% = 12,880 units
Total unit sales = 21,180

10,590 units loaded with PESA = $188.86 PESA development charge (Break-
even)
$245.51/unit with 30% mark-up ($56.65 mark-up per machine)

3. Value-in-use pricing: (average life = 3 years) base on 1 year of savings

Labor

1 server = $2,000/machine (calculated as $80,000 salary of operators, operating

40 servers)
4 separate servers = $8,000
= Cost savings of $6,000

**Assumption that the increased efficiency to function as 4 servers increases

capability of operator to replace the work of 4 machines in 1

Application software licenses

$750 x 4 servers = $3,000

$750 x 1 server = $750
Cost savings = $2,250

Electricity annual cost

$250 x 4 servers = $1,000

$250 x 1 server = $250
Cost savings = $750 (enough to cover the entire software licensing fee)
Total savings (YEAR 1 ALONE)
= $6,000(labor)+$2,250(licenses)+$750(electricity) = $9,000
 50-50 split = $4,500/machine (FOR UNITS WITH PESA TECHNOLOGY)

Total savings over life of machine = $9,000 x 3 = $27,000

2) Think broadly about the top line revenue implications from each of the four
alternative pricing strategy. Approximately how much money over the next
three years will be left on the table if the firm were going to give away the
software tool for free versus utilizing other?

Profit without
Status Quo PESA $462.00 5295 $2,446,290
Profit with PESA $273.14 5295 $1,446,276.30
Total $3,892,566.30

Profit without
Competition based PESA $162.00 5295 $857,790.00
Profit with PESA ($26.86) 5295 ($142,223.70)

Total $715,566.30

Profit without
Cost-plus pricing PESA $518.65 5295 $2,746,251.75
Profit with PESA $329.79 5295 $1,746,238.05
$4,492,489.80

Value-in-use pricing Profit only PESA $2,773.14 5295 $14,683,776.30

*Case stated that 50% of machines would be PESA enabled. This calculation is based
upon profits for machines with PESA capabilities alone. If status quo pricing was used for
machines without PESA, additional profits would be 5295 machines x $462 =
$2,446,290.00. Total profits would be: $17,130,066.30 (VALUE-IN-USE PRICING)

3) How is Matzer likely to react to your recommendation?

Given that he is a seasoned veteran with 20 years in the computer industry, which
has used status quo pricing for nearly all of the companies other products, he will
 likely see the pricing decision as highly risky. His recommended conservative
pricing estimate was influenced largely by his focus on the competition in the
basic, low-end server market, Ontario Computer. Given that they charge $1,700,
and Matzer has recommended a $2,000 price point, bringing a recommended
price that is more than double, at $4,500 will likely be met with great opposition
and will require a great deal of explanation before he considers supporting this
pricing strategy.

́ sales force likely to react to your recommendation?

4) How is Cadena s

The sales force is hardware oriented and will feel more comfortable with what
they know. Given that their commissions are 30% of their salary, they may not
devote a large portion of their efforts to mastering a new technology and may not
have confidence in their own ability to push the sales of the new technology.
While they will see the opportunity to boost their commissioned sales by a great
deal in selling this product at a much higher cost, they may see that the risks of
wasting efforts on something that is uncertain outweigh the potential benefits.

5) How are customers in your target segment likely to react to your

recommended pricing strategy? What responses can be provided to
overcome any objections?

The product positioning should also coincide with and justify the pricing. What
they are offering is not a basic (Ontario) or high performance (Radia) machine,
but a machine somewhere in between, which is precisely what the price reflects.
Differentiating their products outside the scope of one or the other will likely gain
the company a selling point that will allow them to compete in either market and
does not force consumers to chose a machine on one end of the spectrum or the
other.
It will provide the option for consumer to find a middle ground between the two
extremes currently on the market. Their product can be positioned as a basic and
high performance machine bundled into one. The basic machine, similar to that
offered by Ontario, is in its hardware, while the PESA software to elevate its
 performance, allowing it to function more like a Radia higher performing
machine.

Customers have the alternative to buy a system through Ontario for less than half
of the Atlantic price point. Upon initial glance, the $4,500 price tag may seem
incredibly outlandish to them. However, given the projected cost savings through
this new technology, its price can be defended. Though the Tronn is currently
positioned in the basic market, explanation of how much more it offers will be
helpful in justifying the steep premium price. The company history of customer
service can also be cited as an added benefit to delivering on the efficiency and
value promised with the new product.

Offering a hardware and software machine in one can allow customers to deal
with repairs, any problems with the machine and the like through a single
company. By integrating the two, they will be working with a team of people
knowledgeable on both operating items and who are well versed in how the two
interact and affect one another. In the past, they spent time and energy on
managing each part separately; at times not knowing which part was at the route
of the problem. In purchasing the two-in-one package deal, time wasted is
virtually eliminated.

́ senior Management team likely to react to the Atlantic

6) Is Ontario Zink s
Bundle?

When first introduced, Ontario may not react at all to the Atlantic bundle. Given
that the price point is so much higher than what they offer the product for, they
will likely not see it as a threat to their high existing market share. The online
sales component and differing strategies of the two companies may further enforce
their beliefs. However, if Atlantic does begin to infiltrate their market power, they
could rethink the decision and either begin creating software similar to PESA in
order to regain their competitive edge, or ramp up their offline sales efforts in
order to compete and deliver through multiple sales outlets.