Atlantic Computer Case

Analysis
Atlantic
Computer :
A Bundling
of Pricing
Options

Under the Guidance of

Prof . Ravi Shekhar Kumar

Abhinandan Singh - MP15003

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Outline
U.S Server Market Overview
Projected Market Volume by Segment
Company Overview Atlantic
Computer
Product Overview - Tronn
Problem Statement
Pricing Strategy
Conclusion
Recommendation

U.S Server Market Overview

Two main market Segments Basic Server and
High performance server.
3% expected growth in High performance
segment and 36% growth in Basic Server
segment.
Ontario dominates the basic server market,
claims 50% of revenue in this segment.
Software tools for sever maintenance was given
for free by companies.
Cost plus pricing approach was being followed in
server industry.
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Projected Market Volume by

Segment
Market Forecast for year 2001,2002 and 2003
350000
300000
250000
200000
150000
100000
50000
0

2001

2002
Basic segment

2003

High Performance Segment

Significant growth in Basic Segment in the next 2 years

Dot com boom (Internet, Web sites, e-commerce) fueled
the growth.
Share of Basic segment to be increased in overall market
to be increased

Company Overview Atlantic

Computer
Manufact
urer of
Servers
and Other
High tech
Products
Largest
Player in
overall
Computer
Industry

Competing in the server market for 30

years.
Most sold product is Radia, a high end
performance server
Known for providing top-notch, highly
reliable products responsive sales
assistance.
Follows
high
tech
direct
sales
channel
Currently
holds
20%
of the
revenue
market
share in premium segment
Followed an overarching strategy based on
computer intimacy and product
differentiation

Year 2000, Launching a Product Tronn in Basic Server

Segment. What pricing strategy to follow???

Tronn Product
Overview

Designed to meet emerging U.S

Basic
market opportunity
Category
The new server falls under the Basic server segment
which had been growing at a very fast rate, nearly
36% in the next 2 years.
Loaded with PESA to perform at high
High Speed speed
Software tool PESA (Performance Enhancing Server
Accelerator) increased the speed to 4 times faster
than its standard speed.
Long run
Provides low cost benefit in long run
benefit
Provides first order benefits as purchasing this server
will reduce no of servers and also lead to lower
annual electricity charges, software license costs and
labour costs.

Atlantic Performance Testing

Results
Applications Tested

Tronn Tronn
with
withou
Pesa t Pesa

High Performance/ Computer Intensive

Workloads
(e.g. running complex scientific models)

180

187

Graphic Applications
(e.g. creating custom graphics/ video)

280

281

Enterprise Applications
(e.g. Supply Chain Management)

264

254

341

300

812

404

2222

542

High
e-Mail Applications
performanc
(e.g. Microsoft Outlook, Lotus Notes)e
File Sharing
Improveme
(e.g. shared storage and data backup
ntapplications)
Web Servers
(e.g. running websites)

Problem Statement
Product Bundling (Tronn & Pesa) or
Software to be given for free?
Pricing Strategy to be followed ?

Market Price for the Server ?

Pricing Strategy
Various Options
Charging only for hardware and give
PESA software tool for free following
company tradition. No Product
Bundling
Competitor Based Pricing (Charging a
price equal to 4 Ontario Zink server)
Cost plus pricing
Customer Perceived Value Pricing
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Should Atlantic go for Product

Bundling
Tradition in the Industry is to give away server
management software tool for free.
PESA software development cost = $2,000,000
Provided the company does not go for Product
Bundling it will have to forego the R&D
investments done in PESA software tool.
Initially it should not charge for software
as it is new product and industry tradition
is not to be violated
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Cost Plus Pricing

Year
2001
2002
2003

Industry Sales
$50000
$70000
$92000

Market Share
4%
9%
14%

Expected Sales of Tronn

2000
6300
12880
Total Sales
21180

Expected Sales for the Server Tronn

21180

50% of Servers Loaded with PESA (Case Study)

10590

Total R&D Cost of PESA software tool (Exhibit 3)

$2000000

Cost to be recovered per server

Development Cost of Tronn Server (Exhibit 3)

$188.8574
$1538

Total Cost of Tronn Server

$1726.857

Markup of 30% above costs

$518.0572

Final Selling Price for Tronn Server

$2245
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Customer Perceived
Value Pricing
Parameters
Price of Servers
Electricity Cost(Annualy) 250 per server
Cost of Software License (750 per
software)
Total Cost
Savings by Using Tronn
50% of Total Saving (Equal Sharing of
Gain)
Final Cost for Single Atlantic Software
Server

Aggress
ive
Conservati
4
Pricing ve Pricing Ontario
1 Tronn
2 Tronn
Zinc
Server
Server
Server
$2000
$4000
$6800
$250
$500
$1000
$750
$3000
$7800

$1500
$6000
$4800

$3000
$10800
0

$3900

$2400

$5900

$3200

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Competition based
Pricing
Price of one server

Conservative
Approach
(2 Tronn Server = 1
Zinc Server)

Aggressive
Approach
(4 Tronn Server = 1
Zinc Server)

$3400 (2*1700)

$6800 (4*1700)

Note: Cost of 1 Zinc server = $1700

Conservatively we can assume that performance of 2 Tronn

Severs will be equal to 4 Ontario Zinc Server
However, pricing aggressively we can assume 1 Tronn
server to be equivalent to 4 Zinc Servers in performance.

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Conclusion
Among the 3 pricing strategy options the Competition
based pricing looks the most profitable but it might lead to
a price war so the best option considering the product is
New Value pricing should be adopted to set the price.
Industry tradition of providing free software tool should be
followed otherwise cost for the same might offset the
customer.
Price war may deter Atlantic Computers more as cost for
Tronn is $1538 (excluding recovery cost of PESA) which is
very close to $1700 (Market price of Zinc).
Pricing too high is also not an option as it is a high growing
market and no decision should hamper the demand.

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Recommendations
Product Bundling??

Initially it should not charge for software as it

is new product and industry tradition is not to
be violated
Pricing Strategy ??
The firm should go for value in pricing with a
conservative approach
Market Price of 1 Tronn Server ??
Following the customer perceived value pricing
strategy market price comes out to be $3200
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