Atlantic Computer Case Study

Varsha Varala, 62310479, Section J

1) What price should Jowers charge DayTraderJournal.com for two Atlantic Bundles (2 Tronn
servers + 2 PESA)? There are four approaches to price the Atlantic Bundle – status-quo,
competition-based, cost-plus, and value-in-use pricing. Determine the price recommended
by each of these approaches. (12 points)

Pricing for 2 Atlantic Bundles (2 Tronn servers + 2 PESA)-

a. Status Quo: Here we are following the company’s old tradition to give away the PESA
software tool for free and only charge the customers for hardware. It corroborates with a
wide belief that software tools are just part of the servers and should be provided for free.
So, the price charged to customers would be $ 2000 per Tronn server + PESA
And for 2 Atlantic bundles the pricing would be $ 4000

b. Competition-based:
The biggest competition faced by Atlantic computers for it’s basic server is from Ontario Zink
servers. In that case one Atlantic bundle can perform as better as 2 basic zink servers.
For competition pricing, we directly charge customers what they would pay for our
counterpart’s product with the same performance output.
So 2 Atlantic bundles = 4 Zink serves
Price of one zink server = 1700
Price of 2 Atlantic bundles = 1700*4 = $ 6800

c. Cost-plus pricing:
R&D Costs = $2,000,000
Forecasted sales for Tronn servers for 3 years = 50,000*0.04 + 70,000*0.09 +92000*0.14)
=21180 sales
It is also given that we assume at least 50% of Tronn servers would have PESA attached
So, projected sales for PESA = 21180 /2 = 10590 units
For R&D costs per unit = 2,000,000/10590 = 189
Costs for PESA per unit = $ 189
Total per unit cost of Atlantic bundle = Server cost + PESA cost = 1538 + 189 = $ 1727
Given that we would consider 30% markup = 1727* 30% = 518
Total per unit price of Atlantic bundle = 1727+ 581 = $ 2245

Hence Jowers should charge DayTradeJournal.com $ 4490 for 2 Atlantic Bundles as per Cost-
plus pricing methodology.

d. Value in use pricing: Here we are trying to capture a portion of what customers would save
and the value we add to them by buying Atlantic bundle.
Economic value to customer = Reference value + Differential value
Currently we can assume referential value as next best alternative that is Ontario’s Zink
servers since they cost less than Tronn server and have equally comparable performance.
Given that, 1 Atlantic bundle performs as good as 4 Zink’s servers but in terms of value
Jowers wanted to take a conservative approach and equated 2 basic servers with PSA versus
4 basic servers for value addition comparison. So 1 bundle = 2 basic servers
 Since the savings/gain are 50% split, the price of Atlantic bundle would be 2000 + (4400/2)
= $ 4200
Hence for 2 Atlantic bundles the price is $ 8400

Note: Here we have taken server price for bundle as $2000 and later added the gain margin value
from the 50% savings split.

2) Compare the top-line revenue implications of each of the four pricing strategies.
Approximately how much money over the next three years (assuming no discounting) will be
“left on the table” if the firm were to give away PESA for free (status quo pricing) versus
utilizing one of the other three pricing approaches? (4 points)

Top-line revenue implications using projected sales of the next 3 years:

Projected unit sales of servers & PESA (assuming 50% PESA attachment with servers): Lets
consider the sales for PESA and revenue generated from these sales over the next 3 years.

a. Status quo pricing: Price per unit = $2000 and cost per unit = $ 1804
Total Revenue generated over 3 years = $ 2,075,640

Status quo pricing 2001 2002 2003

Total cost for Atlantic Bundle 1804000 5682600 11617760
Total price for Atlantic Bundle 2000000 6300000 12880000
Revenue 196000 617400 1262240
Total Revenue 2075640

b. Competition-based pricing: Price per unit = $3400 and cost per unit = $1804
Total Revenue generated over 3 years = $ 1,690,140

without PESA % rate Ratio

542 310% 4.09963

c. Cost-plus pricing: Price per unit = $2245 and cost per unit = $1804
Total Revenue generated over 3 years = $ 4,670,190
 without PESA % rate Ratio
542 310% 4.09963

d. Value-in-use pricing: Price per unit = $ 4200 and cost per unit = $1804
Total Revenue generated over 3 years = $ 25,373,640

without PESA % rate Ratio

542 310% 4.09963

Hence if Atlantic computers were to give away the PESA for free, we would be losing $23,298,000
when compared with value in use based pricing.

3) What can Jowers recommend to get Cadena’s hardware-oriented sales force to understand
and sell the value of the PESA software effectively? (2 points)

The following recommendations could help the sales force team:

1. Every customer values the product differently, based on exhibit 2 we can leverage the
beta testing results that the Atlantic bundle is 4 times more valuable for web based
services and twice the value add for file sharing services. We can segment our customers
based on their customer profiles and map the product offerings of PODs and POPs of
Atlantic bundle to target them.
2. Sales force can utilise CLV tool to identify profitable customers and develop relationships
with them.
3. We can create an alignment mapping for different sales force teams to target different
customer segments where each sales force team would specialise in selling the value
pertaining to one customer group
4. Focus on collaborative selling by showing the customers how our differential value would
create impact in their business. Eg, how much of value and monetary benefit
DayTradeJounal.com has made by choosing Atlantic bundle.
5. We can conduct workshops, seminars for the sales teams to enhance their
understanding of the product as well as demonstrating the value of the product
6. Create a goal-based sales compensation plan for sales teams initially with higher
commissions as we launch the new product where we can set goals based on projected
sales. Later to increase the market share we can shift to rank based plan where % sales
month on month would determine their sales compensation.
7. We can have yearly sales force group contests to encourage healthy competition and set
metrics based on business goals (increase sales breadth, increase penetration, untapped
potential market, new customer sales)
 4) How are customers in your target market likely to react to your recommended pricing
strategy? What response can be provided to overcome any objections? (2 points)

Recommended strategy- value in use pricing strategy. This would help us obtain good margin
as the sales keep increasing. Whereas competition-based strategy is risky as the competitor
might change his price any time for short term gains and we would not be able to
accommodate the R&D costs in that case.

Initially there might be some reservations about the value-based pricing strategy since
customers expect to have the software tool PESA for free. But given that we show the
customers the differential value we are adding and the long run monetary benefits, we will
be able to tie up the price with the value we add to the customers.
Eg, In customer profiles, Web server has 15 employees, limited employees would mean they
can reduce the labour costs by choosing Atlantic bundle where it takes only 1 administrator
to run the server as compared to two. So the company can save $20,000 in an year from
choosing the bundle.
We can map our offerings with their top 3 minimum requirements and showcase the
differential value.
When we compare the results from beta testing with vs without PSA, it is clear that customer
would appreciate the findings and gauge the performance of Atlantic bundle to be more
meaningful.

with PESA without PESA % rate Ratio

Web Services(e.g., running websites such as www.espn.com) 2222 542 310% 4.09963
File Sharing(e.g., shared storage and data backup applications) 812 404 101% 2.0099
e-Mail Applications(e.g., Microsoft Outlook, Lotus Notes) 341 300 14% 1.13667
Enterprise Applications(e.g., supply chain management) 264 254 4% 1.03937
Graphics Applications(e.g., creating custom graphics/videos) 280 281 0% 0.99644
High Performance/Computer Intensive Workloads(e.g., running complex scientific models) 180 187 -4% 0.96257
Assume that DayTraderJournal.com would purchase two Atlantic Bundles (2 Tronn servers + 2 PESA)
to satisfy their requirements (as opposed to 4 Ontario Zink Servers). In arriving at the price using the
value-in-use pricing approach, assume that Atlantic Computer would share 50% of the generated
value (Total EVC – Variable Cost) with the customers. You may use the following table to calculate the
price using the cost-plus pricing approach:

Cost – Plus Pricing

R&D Costs $ 2,000,000
Forecasted PESA sales (units) 10590
Per unit PESA cost 189
Total per unit cost $1538 + $189= $1727
Markup on cost 30% = 518
Price for Tronn + PESA $ 2245
Price for 2 Tronn + 2 PESA $ 4490