CASE ANALYSIS #1

ATLANTIC COMPUTER: A BUNDLE OF PRICING OPTIONS

AUGUST 26,2015

JORDAN MEREDITH
S01146336

On my honor, I have neither given nor received any unauthorized assistance on this
assignment.
 QUESTION 1

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 Ontarios 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

QUESTION 2

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)

QUESTION 3

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.

QUESTION 4

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.

QUESTION 5

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.

QUESTION 6

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.

QUESTION 7

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.