![Reaction of Zink’s management to the threat posed to Atlantic Bundle
Short Term:
Zink’s management might reduce the price of its server
If so, Atlantic can charge the client according to the cost plus approach and show the
savings ($2,611) to them.
[Zink’s price can fall up to their costs of $1,214 countering Atlantic’s cost of $2,246. Since
four servers are needed, the total cost for Zink equals $1,214 * 4 = $4,856.
Therefore, savings = $(4,856 - 2,245) = $2,611]
Long Term:
Zink’s management may come up with an identical software
Atlantic can provide the PESA software free in that case
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Atlantic Computers: A Bundle of Pricing Options
- 1. Atlantic Computers: A Bundle of Pricing Options Presented by Team A6: Daniel Josey Delwyn Menezes Janet Aiona Jasmine Dennis Tejaswini C
- 2. Overview Objective & Company Profile Competitors & Factors influencing Pricing Two-Step Savings & Pricing Alternatives Strategy 1: Status-Quo Pricing Strategy 2: Competition-based Pricing Strategy 3: Cost-plus Pricing Strategy 4: Value-in-use Pricing Review, Break-even Analysis & Recommendation Recommendation to Cadena’s Salesforce Zink management’s reaction to external threats 2 of 13
- 3. Objective: Develop a pricing strategy for Atlantic Computers called the ‘Atlantic Bundle’ consisting of the new Tronn server and the PESA (Performance Enhancing Server Accelerator) software Company Profile: Largest player in the overall computer industry – competing for 30 years Manufacturer of high-end servers and high-tech products Jason Jowers responsible for the pricing of the Atlantic Bundle The Tronn was developed specifically for the emerging US market PESA would allow Tronn to perform upto four times faster Two main market segments – Traditional segment & Basic Server segment 3 of 13
- 4. Competitors: Ontario Computer, Inc. with Zink product line Claimed 50% maket share in the basic server market Zink servers performed at approximately the same level as Atlantic’s Tronn Factors influencing pricing: Traditional focus on hardware; limited emphasis on software Software tools were historically provided for free (Matzer’s belief) Long relied on standard approach (cost-plus pricing) in the industry Gains accrued by customers from PESA to be carefully considered Importance of conveying two-step savings to customers 4 of 13
- 5. Two-step Savings: First-order savings: purchase of fewer servers Second-order savings: Lower annual electricity charges, software licenses, labor costs Pricing Options Alternatives: Jowers had four routes to go about for pricing the Atlantic Bundle: 1. Status-quo pricing 2. Competition-based pricing 3. Cost-plus pricing 4. Value-in-use pricing 5 of 13
- 6. Strategy 1: Status-Quo Pricing Charge for hardware; Software free Established price of basic server = $2,000 Comparison was made between two Tronn servers loaded with PESA against 4 Ontario’s Zink servers Price of Atlantic Bundle = Price of Tronn + Free PESA software = $2,000 Lowest price option; devalues the package Failed to capture the total value of the product Amount spent on R&D ($2,000,000) had to be foregone 6 of 13
- 7. Strategy 2: Competition-based Pricing Charge based on competitors pricing Conservative model: Two Tronn equals Four Zinc servers (priced $1,700 each) Price of Atlantic Bundle = Price of 2 Zinc Server = $1,700 * 2 = $3,400 Aggressive model: One Tronn equals Four Zinc servers (priced $1,700 each) Price of Atlantic Bundle = Price of 4 Zinc Server = $1,700 * 4 = $6,800 Factors in a portion of the costs associated with software development 7 of 13
- 8. Strategy 3: Cost-plus Pricing Year 2001 2002 2003 Totals Market Volume (units) 50,000 70,000 92,000 Market Share of Atlantic 4% 9% 14% Total Sales 2,000 6,300 12,880 21,180 Estimated PESA Sale (50%) 1,000 3,150 6,440 10,590 50000 70000 92000 200000 205000 210500 0 100000 200000 300000 400000 2001 2002 2003 PROJECTED MARKET VOLUMES BY SEGMENT Basic Segment High Performance Segment Cost of Atlantic Tronn Server $1,538 Cost of PESA per Server 2,000,000/10,590 = $189 Total Cost of Atlantic Bundle 1,538 + 189 = $1,727 30% Mark-up 1,727 * 0.3 = $518 Final Price 1,727 + 518 = $2,245 Price of Atlantic Bundle = $2,245 8 of 13
- 9. Strategy 4: Value-in-use Pricing Considering four Zink servers equal two Tronn servers and 50-50 savings sharing Savings: (9,400 – 5,000) = $4,400 Profit Sharing: 50-50 = $2,200 Price of Atlantic Bundle = $2,000 + $2,200 = $4,200 Savings Information Two Zink Servers One Tronn Server Electricity Savings 250 * 2 = $500 $250 Software License Savings 750 * 2 = $1,500 $750 Labor Costs Savings 80,000/40 = 2,000 * 2 = $4,000 $2,000 Cost of server 1,700 * 2 = $3,400 $2,000 Total $9,400 $5,000 9 of 13
- 10. Review & Break-even Analysis: Pricing for all four alternatives and their respective break-even units and time: Price Cost Contribution R&D Cost Break-even (units) Break-even (Year) 1. Status-Quo Pricing 2,000 1,538 462 2,000,000 4,329 2003 2. Competition-based Pricing 6,800 1,538 5,262 2,000,000 380 2001 3. Cost-plus Pricing 2,245 1,538 707 2,000,000 2,829 2002 4. Value-in-use Pricing 4,200 1,538 2,662 2,000,000 752 2001 Recommendation: Go with Strategy 4, Value-in-use Pricing: second highest revenue, second lowest BEP Provides better foundation for sales strategy Captures the essence: savings that the customer accrues from buying the product Offering Tronn at the price that is the same level of Zink ($2,000) 10 of 13
- 11. Recommendations for Cadena’s Sales Force The sales force needs to be trained to sell products on the basis of the following points: Communicate on the savings/gains/value to the customer Performance increase in Tronn, especially with PESA software tool Emphasize on the lower acquisition and possession costs Ensure excellent after sales service for customers Motivation for the salesforce: Business model intact: 70% salary and 30% commission Higher the revenue, higher is the commission per sale of a server 11 of 13
- 12. Reaction of Zink’s management to the threat posed to Atlantic Bundle Short Term: Zink’s management might reduce the price of its server If so, Atlantic can charge the client according to the cost plus approach and show the savings ($2,611) to them. [Zink’s price can fall up to their costs of $1,214 countering Atlantic’s cost of $2,246. Since four servers are needed, the total cost for Zink equals $1,214 * 4 = $4,856. Therefore, savings = $(4,856 - 2,245) = $2,611] Long Term: Zink’s management may come up with an identical software Atlantic can provide the PESA software free in that case 12 of 13