Case 5- Atlantic Computer: A Bundle of Pricing Options

1. What price should Jowers charge DayTraderJournal.com for the Atlantic Bundle
(i.e., Tronn servers + PESA software tool)?

Jowers should charge $3,500 per unit of Atlantic Bundle ($2000 for server + $1500 for PESA).
Below are round1 and round 2 benefits:

 Round-1: At $3500 per unit of Atlantic Bundle, customer is paying $200 more than buying 4
Zink server ($1700 each). But this additional $200 will help customer to save significant
amount on operational cost.
 Round-2: Per details in the exhibit-1, each additional dollar spent on acquiring Atlantic
Bundle will save $29 a year on operational activities. This is significant long run saving.

So overall, DayTraderJournal.com will save $5800 from this transaction. Exhibit-2 shows the
calculation of value PESA will create for DayTraderJournal.com by saving cost for operational
activities.
Also, by charging $3500 per unit of Atlantic Bundle, Atlantic Computer will be able to capture
part of the value that will be created due to PESA tool. The calculation total value created and
share of it used to determine price of PESA are explained in exhibit-2.

2. Think broadly about the top-line revenue implications from each of the four
alternative pricing strategies. Approximately how much money over the next three
years will be “left on the table” if the firm were to give away the software tool
away for free (i.e., status quo pricing) versus utilizing one of the other pricing
approaches?

As shown in the exhibit-3, with status quo pricing, Atlantic Computer would be foregoing big
chunk of money by giving PESA away for free. Moreover, thinking through the big picture view
of overall industry, Atlantic Bundle is the product that could change (reduce) the demand (in
terms of number of servers in the market. So lower price can give Atlantic Computer short term
benefits of capturing higher market share but decrease in demand will impact both revenue and
profitability at long run and hence setting up right price for Atlantic Bundle is very important.

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

Matzer is not going to like $3500/unit of Atlantic Bundle. As details provided in the case, Matzer
has done thorough analysis of potential of market for basic servers. The demand for basis
servers is going to increase rapidly in coming years and it is key for Atlantic Computer to start
penetrating in this market in order to increase overall revenue. With this view, he decided to
develop a new product line in the basic server segment. Now, Ontario Computer is dominating
this market and selling servers that best serves customers' need at lower price is the main
reason behind their success. So Matzer would be more inclined towards penetrating market
 with aggressive pricing and this why he will not agree with pricing Atlantic Bundle for
$3500/unit.
4.
a. How is Cadena’s sales force likely to react to your recommendation?

As Cadena's sales force salary structure was 70% salary and 30% commission (assuming
that commission is based on the sales and not on number of units), they would be fine
to sell Atlantic Bundle for $3500/unit. Selling bundle at recommended price will earn
them almost double commission compared to selling the bundle at $2000/unit.

b. What can Jowers recommend to get Cadena’s hardware-oriented sales

force to understand and sell the value of the PESA software effectively?

The industry norm is to give away software tool and price for the server only. But here,
it is the software tool that is going to create most of the value both for customers and
for Atlantic Computers. Hence it is very important to communicate to customers how
and how much PESA can help them to save. The only effective way to communicate this
is charging appropriate price for PESA.

So to get Cadena's sales force to understand the value of PESA and sell it at appropriate
price, Jowers should recommend using the calculation per shown in exhibit-1 and
exhibit-2. Each sales person should be knowing the calculations to find overall value that
PESA can create and how we are determining the price of the software by sharing a
portion of overall value.

5. How are customers in your target market likely to react to your recommended
pricing strategy? What response can be provided to overcome any objections?

At first sight customers would not like recommended pricing for Atlantic Bundle as

o They would find the per server cost for Atlantic Bundle much higher (double) than that
of Zink.
o Being unaware of the capabilities of PESA, they would not prefer to pay for the tool.

The model that we used to determine price for DayTraderJournal.com (exhibit-2) will be a useful
tool to showcase the overall value created by Atlantic Bundle in terms of savings on operational
activities throughout the lifetime of the server. Customers will not see much benefit with
acquisition cost saving (round-1) but PESA will give significant benefits by saving on possession
cost (round-2). Showcasing customers that server with PESA loaded onto it will cut down the
number of servers required to server the purpose by half and this will be the source of cost
saving will help customers to realize the benefits of purchasing Atlantic Bundle and using it for
long term.
6. How is Ontario Zink’s senior management team likely to react to the Atlantic
Bundle?

Ontario's senior management is not expected to reduce the price of Zink server as to give more
of round-1 benefits (acquisition cost savings) because reducing price will impact their
profitability for short term without gaining much of benefits (in terms of greater market share)
at long run. At current price of $1700 per Zink server, Ontario is earning at 40% of profit margin.
Suppose that to match with Atlantic Computer's profit margin for Tron server (without PESA) of
30%, Ontario reduces the price of Zink server by $100 per server; it will not be able to create
significant value in terms of lower acquisition cost as compared to that with Atlantic Bundle.
Even after reducing the price of Zink server, due to the fact that number of servers required for
meeting processing needs is not going to change, operational costs will remain higher compared
to that with Atlantic Bundle. As shown in exhibit-4, using the data of DayTraderJournal.com,
with Atlantic Bundle round-2 benefits (savings on possession cost) will still be significant ($5400
per year) comparing the operational cost of number of required Zink servers.

So per game theory, the most likely action that Ontario Zink's senior management is expected to
take is finding ways to enhance performance of the server to bridge the gap between number of
servers required to achieve required level of performance. Also, at short run they are expected
to react with aggressive marketing campaign on the basis of lower price and related acquisition
benefits.
 Exhibits
Exhibit-1: Operational benefits due to PESA

Total
Operational
Savings (one
year) $6,000.00
Value Sharing 50%
PESA -
Price/unit $1,500.00
Tronn -
Price/server $2,000.00
Atlantic
Bundle -
Price/unit $3,500.00
Excess Price
Compared to
Zink Servers $200.00
Savings/exce
ss$ $29.00
Savings/$ of
PESA $3.87

Exhibit – 2: Recommended pricing of

Atlantic Bundle

# of Servers Acquisition Cost Possession Cost

Per Server Total Electricity Licens Admi Total
es n
Tronn 2 $3,500 $7,000 $500 $1,500 $4,00 $6,00
0 0
Zink 4 $1,700 $6,800 $1,000 $3,000 $8,00 $12,0
0 00
Savings ($200) $6,000
Total Savings 5800
Exhibit-3: Revenue comparison of status-quo pricing with other pricing
options

Expected Revenue – Atlantic Bundle - Status Quo Pricing

2001 2002 2003 Total
Expected 1000 3150 6440 10590
Sales
Price/unit $2,000 $2,000
Status quo $2,000,000 $6,300,000. $12,880,000 $21,180,000
00 .00 .00
Forgone Revenue – Atlantic Bundle
Value-in $1,500,000.0 $4,725,000. $9,660,000. $15,885,000
0 00 00 .00
Cost Plus $245,514.64 $773,371.1 $1,581,114. $2,600,000.
0 26 00
Matching $1,400,000.0 $4,410,000. $9,016,000. $14,826,000
Zink Price 0 00 00 .00