Atlantic Computer is an outstanding player in the high-end server market. It has discovered a new venture in the server segment and developed Tronn to answer the needs of the segment. With the use of PESA or the "Performance Enhancing Server Accelerator," Tronn is able to function faster than its normal speed. Atlantic Computer is faced with the question on pricing Tronn and PESA. It does not merely considers cost-plus, competition-based, and status-quo pricing but includes value-in-use pricing to come up with the appropriate but optimum cost of pricing.
Neeraj Bharadwaj; John B. Gordon
Harvard Business Review (2078-PDF-ENG)
May 28, 2007
Case questions answered:
- Define the problem and provide a detailed analysis.
- Provide an economic value calculation, a F-B-V analysis, and a value-based pricing analysis.
- State your recommendations, especially as to the pricing strategy.
- What would be the price if Atlantic Computer were to charge equal to what a customer would pay for four Ontario Zink servers?
- What would be a cost-plus approach to pricing PESA (based on the software tools development costs)?
- What would be the Atlantic price based on value-in-use pricing assuming 50-50 sharing of consumer gains?
- Make a document describing the value in use pricing to any Indian marketer of any product of your choice. Your description should contain:
4a.) Why does value in use pricing make sense for the particular product chosen by you?
4b.) What are the limitations of a value in use pricing approach?
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Case answers for Atlantic Computer: A Bundle of Pricing Options
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Atlantic Computer is a manufacturer of servers and high-tech products that operates in an industry with two market segments1: the traditional, where Atlantic leads with their premier product, Radia, which represents a sustained 20% market share for the past 30 years, and the basic server market segment.
The basic server market is a fast-growing market currently dominated by Ontario, with a market share of 50% thanks to its Zink server. Atlantic wants to enter and lead this market segment with its new server Tronn. Tronn2 is a competitive option, and it could dominate this market if it were sold in a bundle with the PESA2 tool. PESA is the software tool also created by Atlantic that enhanced the performance of the Tronn server by accelerating its speed by four times. By selling Tronn and PESA together, Atlantic will outcome Ontario and its server Zink by offering an Economic Value Estimation of $23,100 per bundle3.
PESA and Tronn have other advantages, aside from the enhancement of the server speed: Customers will need fewer server units reducing not only their costs but also their office spaces, the electricity charges will be less as well, and labor costs will also be reduced since customers will need a proportionally direct number of employees to servers. Finally, clients, especially in web server and file-sharing application segments, will gain accuracy by using the PESA software tool.
The main issue that Atlantic Computer is currently facing is to present the optimum price for the “Atlantic Bundle,” this is one Tronn server with PESA software tool. Atlantic will be able to achieve its goal by analyzing four strategic scenarios and by developing the optimum pricing strategy. There are other associated problems, such as what strategy to follow to prevent the competitor’s reaction, Ontario, etc., that are not required in this paper.
As previously mentioned, Ontario Computer, Inc. is the main competitor in this market. It has half of the basic server market, 50%, conducts the majority of the sales online, and is proud to have a business model based on operational excellence. This means that they have managed to create a competitive pricing advantage by eliminating many non-value-added activities and cutting down the associated costs.
If Atlantic applies the Status quo pricing strategy, it means that it goes with the industry flow by charging only for the hardware –the server– and giving the software –PESA tool– for free. The Pros are that this is the lowest priced option.
However, there are also Cons. This being that this option does not consider all the costs associated with the server, and it fails to capture the total value of the bundled-product since PESA is being given away. With the application of this strategy, Atlantic will be charging $2,000 for Tronn and $0 for PESA, offering the “Atlantic Bundle” for $2,000 as the sale price. The CM per unit will be $462, 5% less than Zink, and the NPV of the total CM after 3 years will be $1,396,064.87.
If Atlantic Computer applies the Competition based strategy, it will charge the equivalent to four Zink servers sold by Ontario since one Tronn server with PESA works four times faster than one Zink server. The Pros are that this option would deliver value in quality of performance and cost savings. The main con is that this is the priciest option, and customers might not see the added value. The sale price will be $6,800, and the CM, $5,262, over 90% more than Zink. While the NPV of the total CM after 3 years will be $36,679,855.78, it will be very difficult to market as it will be seen as a big loss one single time, probably, without seeing the value-in-use that Tronn+PESA adds.
If Atlantic Computer opts to implement the Cost-plus pricing strategy, it will be…