Section C Group 10

Issue

To determine the pricing strategy for Atlantic Bundle (Tronn server and PESA software tool)

Recommendations

Atlantic computers should charge a price of $4,850 for an Atlantic Bundle using Cost plus pricing approach to generate maximum revenue But the sales division of Atlantic Computers should ensure to meet the sales target every year Development cost of PESA tool is a huge investment by the company so this a very important issue which Matzer should consider while deciding the price Cadena might think customer would not accept the product due to high pricing. But high price implies commission as high as 30% and it will be a motivating factor for Cadena and his sales team.

Recommendations

Senior Management will support this pricing strategy as this take into consideration the huge development cost incurred Customers, initially will be apprehensive as the price is around 3 times that of a Zink server. But the sales team should convey the values and product benefits over others The Company should observe their sales over a period of time. If the sales dont meet the forecast it is less likely to reach the optimal price, hence they should use the value in use pricing strategy

Recommendations

Competitors (Ontario) due to the operational excellence will compromise with their margin and reduce the price. In response, Atlantic computers should stress on their high performance level

Analysis
Atlantic Computers was entering into new market segment which was dominated (50% market share by revenue) by Ontario Computers Tornn server with PESA software performed up to 4 times faster than its standard speed Though product benefit was evident, determining the right price is crucial for company Traditionally company believed in giving software tool to customer for free The company sales team had no prior experience of selling PESA as a software tool

Analysis

Based on test results it was found that PESA is beneficial only for File Sharing and Web Servers and for High performance servers it actually slow down the server The estimate market demand for 2001 was about 50,000 units and expected to have CAGR of 36% through 2003 Expected Sales Volume:
2001 Total Basic segments Atlantic share No. of servers with PESA 50,000 4% 1,000 2002 70,000 9% 6,300 3,150 2003 92,000 14% 12,880 6,440 21,180 10,590 Total 212,000

Atlantic share (No. of servers) 2,000

Analysis Pricing Strategy

1.

Status Quo Pricing:

Price of Atlantic Bundle is equal to price of Tronn server i.e. $2,000

2.

Going Rate Pricing:

Price of bundle is two times the price of Ontario Zink servers i.e. $3,400 (based on conservative estimate)

3.

Markup Pricing (Cost plus approach):

Variable cost per unit = $1,538 No. of server administrators required = 10,590/40 = 265 Cost of Labor = 265*$80,000 = $21,200,000 Fixed cost = $2,000,000 + $21,200,000 = $23,200,000 Unit cost = variable cost + fixed cost/unit sales = $3,730

Analysis Pricing Strategy

Markup price = unit cost *1.3 = $4,850

4.

Value in Use Pricing:

1 Atlantic bundle = 2 Zink basic servers First Order Saving = $3,400 - $2,000 = $1,400 Second Order Saving

Electricity ($250) + Software License ($750) = $1,000 Savings out of Labor = $4,000 (2*80,000/40) - $2,000 (80,000/40) = $2,000

Total Savings = $1,400 + $1,000 + $2,000 = $4,400 Since 50-50 sharing of saving gain i.e. $2,200 Price of Atlantic Bundle = Price of 1 Zink server + Savings = $1,700 + $2,200 = $3,900

Analysis

Top Line revenue

Pricing Strategy Status Quo Going Rate Cost Plus Value in Use

Price of Atlantic Bundle

No. of servers sold with PESA Revenue 1 Price of Tronn Server No. of Tronn servers without PESA Revenue 2 Total Revue (1 + 2)

$2,000
10590 $21,180,000 $2,000 10590

$3,400
10590 $36,006,000 $2,000 10590

$4,850
10590 $51,361,500 $2,000 10590

$3,900
10590 $41,301,000 $2,000 10590

$21,180,000 $42,360,000

$21,180,000 $57,186,000

$21,180,000 $72,541,500

$21,180,000 $62,481,000