Atlantic Computer

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MKT 6336.501 | Pricing

Atlantic Computer: A Bundle of Pricing Options

Atlantic Computer Inc. is the largest player in the overall computer industry, competing in the server market for over 30 years with its high performance server, called Radia. Atlantic Computer and, more specifically, its Server Division is well known for providing high-quality and highly-reliable products, and it has developed a reputation for responsive post-sales assistance. Problems to Address:

1. Atlantic must choose a pricing strategy for the “Atlantic Bundle,” which consists of its TRONN server and PESA software tool, before the SME trade show. 2. Along with the right pricing strategy, Atlantic is also facing the hurdle of breaking away from the well-established industry norm of giving software tools for free and helping the sales force to understand and sell the value of the PESA tool effectively. 3. In addition to factoring in the reaction of Atlantic’s main competitor, Ontario Computer, to Tronn’s entry, Atlantic Computer must consider new strategies that will protect their market share in this particular segment. Company Objectives:

Atlantic’s objective is to enter a new market for basic servers, which has been dominated by Ontario Computer for a long time. With the right pricing strategy, Atlantic Computer hopes to break the existing market structure to gain a large share and high profits from selling the “Atlantic Bundle.” The market demand of basic servers is projected to grow quickly. This market should demand about 50,000 units in 2001, and register about a 36% compound annual growth rate through 2003. To be estimated, it would demand 212,000 basic servers in total from 2001 to 2003. Customer Segment:

The main customers for Tronn are small and medium-sized enterprises, which increasingly need basic computing capabilities to perform simple, repeatable tasks such as showing website information on the internet. More specifically, companies who mainly use basic servers for sharing files and running websites will benefit most from the Atlantic Bundle. This is reflected in application test reports, which indicate that Tronn has a higher performance rate for these tasks when paired with PESA. In addition, companies who purchase the Atlantic Bundle will incur lower possession and acquisition costs relative to performance. Thus Atlantic Bundle will appeal to SME customers who want to save on operation costs. Cost Structure:

For Atlantic Computer: Tronn cost per server = $1,538 Radia cost per server = $7,586 PESA Software development costs = $2,000,000 Sales force compensation structure: 70% salary + 30% commission For customers (annually): Primary first order savings from reduced number of servers and secondary cost savings from lower electricity, software license fees and labor costs. Basic server (up to 40 servers): Electricity + License fees + Labor = $250 + $750 + $80,000 = $81,000 High performance server (up to 20 servers): Electricity + Licenses fee + Labor                  = $400 + $750 + $80,000 = $81,150 Competition:

1. Ontario Computer Inc.
This company dominated the basic server segment for a long time and currently claims 50% of the revenue market share. Ontario concentrates solely on the low-end server market with its Zink product line. Zink performs at the same level as Atlantic’s Tronn without PESA. The majority of Ontario’s sales are generated online. The company’s business model is to provide leading technology to customers via the most flexible and innovative supply chain strategy. 2. Smaller Vendors

These currently make up the remaining fifty percent of the basic server segment. Pricing Alternatives: (Table A)...
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