Atlantic Computer Case Study Report

Atlantic Computers: A Bundle of

Pricing Options
MAR6805 - Marketing Management in the Global Environment

Spring 2018

Yezehao Huai, Daniel Montserrat, Leslie Perez Acevedo, Genesys Triminio, Mingjie Wang, Yinan Wang
Atlantic Computer Case Study Report

Executive Summary

Atlantic Computer, Inc. considered the largest manufacturer of servers and high-tech products.

Such recognition relies on Radia, Atlantic's primary server in the market for the 30 years’

service. This high-performance product helped the Atlantic’s growth in a very competitive

industry. Holding a 20% market share of its high-performance market with the Radia products

led Atlantic to develop a new product on an existing market. Introducing Tronn let Atlantic

Computers to compete with the industry’s direct competitor Ontario and its Zink product line.

Even though, Tronn performance surpasses its competitor, this server is meant to be released as a

bundle with a software tool named Performance Enhancement Server Accelerator. PESA will

allow Tronn to perform four times faster than standard speed and make it easier to access

frequently used applications. Therefore, bundling Tronn and PESA will not only be a company

upgrade, but mostly a customer benefit by acquiring a product worth its value.

As the title of this case reflects Atlantic Computer must work on a pricing plan to introduce

Tronn + PESA into the market without creating a customer’s disappointment or a company

disadvantage with direct competitor. Atlantic’s options rely on the following scenarios; first, the

company can go with a Status-Quo Strategy by offering the product within competitor’s price

range and provide PESA software tools free of cost. Although status-quo strategy will introduce

current customers to acquire the new product, the company’s profit on Tronn’s market will be

gone and any generated income will only cover in-house expenses without adding up on

revenues. Second, Atlantic Computer can go for a Competitive Strategy and offer Tronn 4-times

the price of market competitor Zink by negotiating with the customer the benefits of Tronn +

PESA. By entering the market aggressively, the company can be impacted on its market share by

losing customers that will not see a financial benefit when purchasing Tronn products. Third,
Atlantic Computer Case Study Report

Background

Atlantic Computer, Inc. is considered a major manufacturer in computer industry with

headquarters located at Amberville, New York. Atlantic 30 years’ service accommodate a

successful market of high-end performance servers. Top-quality servers such as, Radia

developed a unique product distinction and high customer satisfaction in a demanding market

sector. Atlantic Computer is about to launch a “server bundle” including the all new Tronn

loaded with PESA software applications. Tronn servers combine with PESA software will

perform four times faster than its typical speed leading its direct competitor Ontario’s Zink.

As one of the largest server manufacturers, Atlantic Computer current assets show a 20% market

share revenue. Atlantic’s new bundle implementation is expected to boost this revenue up by

investing time marketing a new product within a new market. Along with server + software

implementation, our associates are working to fit a new product and customer needs at a

reasonable price. Besides, product performance and hard-working associates, one thing that puts

Atlantic Computer ahead of industry competitors is the fact of having a very consistent trajectory

in the computer business plus an exceptional customer satisfaction before and after a purchase.
Atlantic Computer Case Study Report

Figure 1 Projected Market Volumes

As shown per Exhibit 1, unit volumes classify the market into two different sectors “High

Performance Servers” and “Basic Servers”. High Performance Servers usually considered the

old-style use of servers such as; supply chain management, enterprise resource planning, and

business intelligence. According to a 2-year forecast this segment is expected to be around a 3%

annual growth. Meanwhile, Basic Servers will register a 36% annual growth for the same 2-year

forecast. This data forecast shows that even knowing how Computer Technology and Internet are

in constant evolution, companies still require servers responsible of computing non-complex

tasks.
Atlantic Computer Case Study Report

Figure 2 Performance Results

Atlantic Computer new-product launch forecast provides a breakdown percentage differential of

all server applications in use (shown in previous graph). For example, even though Web Servers

are typically considered a non-complex task, with the implementation of PESA software tools,

the all-new Tronn will increase performance results by a 75.61%. The PESA software tool is

designed to boost Tronn processing speed up to four-times faster than direct competitor Zink.
Atlantic Computer Case Study Report

Figure 3 Result Differences

Problem Statement

Implement a pricing strategy for Tronn + PESA Bundle release without compromising Atlantic’s

potential growth, product quality and customers satisfaction.

SWOT Analysis

Atlantic Computer is facing many decisions it needs to make in regards to pricing options for its

new product, the Atlantic Bundle, which is composed of the Tronn server and new PESA

Software. As there is a new market emerging with the growth of the Internet, Atlantic Computer

will now be able to enter a new marker segment; the Basic Server market. To begin analyzing the

different options Atlantic Computer has for its new product, a SWOT analysis demonstrates the

firm’s current state. As shown in the image below, Atlantic Computer’s strength lies in its length

of time and reputation gained by catering to the computer industry, and more specific, the high-

performance server market with the high-end server named Radia. Atlantic Computer also has

weaknesses it needs to overcome. One of the main weaknesses is lack of experience catering to

this new market segment, not exploring additional sales channels, and having a price that is

already higher than their competitor. Atlantic Computer also has new opportunities available to

them. Examples of opportunities are selling to new customers, competing directly with Ontario,

exploring the Online Marketing Channel (used by Ontario), and considering new pricing

strategies that can increase profit. Threats faced by the firm are mostly coming from the reaction

Ontario will have with the entrance of the new Tronn server with the PESA Software, which

makes one basic server equivalent to four basic servers. Expected reactions include retaliation,

software improvement, price wars, and brand loyalty, among others.

Atlantic Computer Case Study Report

Strengths Weaknesses

•30 years in High-Performance Server •Never served basic-server market

Market •Small Market Share in basic server segment
•Largest player in overall Computer •Hardware price high
Industry •Sales force not trained in selling PESA
•Reputation/brand image of quality software
products •Customers used to getting software free
•Top-notch Post-Sale Assistance •Only use High-Touch direct Sales Channels
•Technological Innovation (PESA
Software)

Opportunities Threats

•Entrance to new market, basic server •Ontario has 50% Revenue Market Share
•Compete with Ontario •Brand loyalty to Ontario
•Use Online Marketing Channel •Retaliation from Ontario, software improvement
•Increase Profit or price
•Impact market with PESA software/Tronn •Negative Reaction from customers
server

Product Line Stretch

In the server product line, Atlantic Computer already has gained reputation for high quality

products and superior post-sale assistance with its high-end server, Radia. For 30 years, this

segment and the computer industry has seen Atlantic Computer carry a brand image of quality

and sophistication. Now, with the Tronn server, Atlantic Computer can take that same reputation

and now cater to a segment that has more basic needs but still desire the same quality as the

higher-end counterpart. Basic-server customers are aware of the high price for the higher-end
Atlantic Computer Case Study Report

product, Radia, and know that any price below is a bargain for the value they will receive. This

addition to the product line is known as product line stretching and can grow in different ways.

In the case of Atlantic Computer, the Radia server will serve as a reference price for the

customer as this is the first product known in the line. Since this product is high in quality and

price, any new product with a lower price or quality will be seen in a positive manner. The

opposite occurs if the first product is on the lower end of the spectrum. Any increase in price,

although an increase in quality will not have the same positive outlook. The reason for the

difference is a psychological reason which explains that “the customer perceives one

presentation in terms of savings (top down) and the other in terms of extra cost (bottom up)” as

mentioned in the textbook, Market-Based Management by Roger J Best.

Figure 4 Product Line Stretching

Atlantic Computer Case Study Report

Product Life Cycle

At this precise moment, Atlantic Computer’s new product, Tronn Server with the PESA

software, also known as the Atlantic Bundle, has finished Stage 1 in the Product Life Cycle

which is the Research and Development stage. Atlantic Computer is now ready to move into

Stage 2 which is Introduction to the market. The introduction is to take place in the Small and

Medium-Size Enterprise Systems Solutions Trade Show-SME for short, which is a big deal for

Atlantic Computer. Here in this stage, the firm is expected to enter the market with a high price,

to distribute selectively and to promote the new product in an informative manner, in order to

educate the potential customer of the use, value, and savings the new product will have.

Figure 5 Product Life Cycle

Atlantic Computer Case Study Report

Option 1 - Status-Quo Pricing

Basic Segment Data

2001 2002 2003
Market Demand 50,000 70,000 92,000
Atlantic Market Share 4% 9% 14%
Atlantic Demand 50,000(0.04)= 2,000 70,000(0.09)=6,300 92,000(0.14)= 12,880
Atlantic's Total Demand (3 years)= 21,180 units

Table 1 Basic Segment Projected Demand

Status Quo Pricing

2001 2002 2003
Tronn Sales Price $2000 $2000 $2000
Market Share (Units) 2,000 6,300 12,880
Total Revenue $4,000,000 $12,600,000 $25,760,000
Less Cost $3,076,000 $9,689,400 $19,809,440
Total Profit $924,000 $2,910,600 $5,950,560
*Total Sales for the next 3 years: $9,785,160 - $2,000,000 (R&D PESA Cost) = $7,785,160

Table 2 Status-Quo Pricing

The pricing strategy known as Status Quo Pricing is a strategy that copies the price levels of its

competitors or maintains the current price levels of similar products or services on the market

(Stuart, 2016). The status quo pricing strategy is a type of adaptive strategy in business. Adaptive

strategies are responses to circumstances that are specific to your market (Stuart, 2016). The

benefits of this pricing strategy is that is creates a steady flow of income for the company with a

steady flow of customers. By having a status quo price, a company can avoid initiating pricing

wars with stronger competitors in the industry. On the contrary, maintaining a status quo price
Atlantic Computer Case Study Report

pressures companies to keep their costs low yet profitable and emphasize the importance of

marketing.

In the case of Atlantic Computer, the Status Quo pricing strategy aligns perfectly with the

traditional pricing strategy used for many years. With Status Quo Pricing, Atlantic Computer

would only charge for hardware and give the PESA software tool away for free. As seen in Table

1, the projected market demand in units for 3 years is 21,180 units. We measure the units for 3

years because the R&D investment cost is expected to be paid off in the next 3 years, 2001-2003.

Under this strategy, the Atlantic Bundle, which is composed of the Tronn Server with the PESA

software is to be priced at $2000 each. Considering the market demand of of 21,180 units, the

total revenue created is $42,360,000. From this figure, we remove the unit cost for each server,

which is $1538 per unit, which totals to $32,574,840 plus the R&D PESA investment cost,

which is $2,000,000. The final projected net income is $7,785,160.

The Pros of keeping this pricing strategy are having low prices which customers always seek,

keeping the traditional approach that senior managers already approve of and avoid challenging

company tradition. The cons of this approach is that maintaining a traditional pricing strategy

can limit the new generation of managers with new ideas and strategies. There is a potential to

increase profit with new pricing strategies and not exploring them can be detrimental to the

bottom figures for the company, especially with the creation of new, valuable products. By not

charging for the PESA software, the company is also devaluing the tremendous value the

Atlantic Bundle has to offer. Before sticking with tradition, Atlantic Computer will have to

analysis 3 other pricing strategies and decide which will have the most impact towards the

customer, the salesforce, and the over financial impact for the company.
Atlantic Computer Case Study Report

Option 2 - Competitive-Based Pricing

Charge a price equal to what the customer would pay for four Ontario Zink servers,

2001 2002 2003

Price Per Bundle 6,800 6,800 6,800
Market Share 50,000 70,000 92,000
Market Demand Rate 4% 9% 14%
Market Demand 2,000 6,300 12,880
Sales Revenue 13,600,000 42,840,000 87,584,000
Cost Per Tronn 1,538 1,538 1,538
Total Server Cost 3,076,000 9,689,400 19,809,440
Net Income 10,524,000 33,150,600 67,774,560
Per Unit Profit 5,262 5,262 5,262
Breakeven Units 380.08
R&D PESA Cost 2,000,000
Total Profit 109,449,160

Table 3 Competitive-Based Pricing Analysis

Competitive-Based pricing is a pricing method in which a seller uses prices of competing

products as a benchmark instead of considering own costs or the customer demand. In this case,

Atlantic’s Tronn was going to compete directly against Ontario’s Zink. And the beta test had

confirmed that the PESA allowed Atlantic’s low-end servers to perform up to four times faster

than their standard speed when loaded with the PESA software tool. That meant that a business

customer could conceivably receive the same level of performance by buying one Tronn loaded

with the PESA as compared to buying four basic servers. The price of Ontario’s Zink servers is

$1700, and one “Atlantic Bundles” is equivalent to four of Ontario’s Zink servers. Therefore,

under the Competition-Based Pricing, the price of one “Atlantic Bundles” would be $1700 x 4
Atlantic Computer Case Study Report

which is $6800. While selling at this price would generate more profits for Atlantic Computer,

but it is not certain that consumers would purchase the “Atlantic Bundle” at this price. The Pros

of the strategy are that if it works, it is extremely profitable and it gives customer a sense of

saving where they only need one Atlantic Server unit instead of purchasing four. And delivers

value in cost savings associated with having one server instead of four. In contrast, consumers

would see that they are only getting one Tronn server at a price that they could get four Zink

servers. They may perceive four servers are more powerful. On the other hand, customer may

expect a lower price with one server which has less power. Which means customer do not want

to spend extra money on the product or service that they do not need. Furthermore, there should

be a discount associated with the reduced material costs. Conclusion, customers would likely not

consider purchasing the “Atlantic Bundle” based on Competition-Based pricing because they

would not see it as a fair price.

Option 3 - Cost-Plus Pricing

  2001 2002 2003

Price of Tronn 1,999.40 1,999.40 1,999.40
PESA 245.51 245.51 245.51
Sales Price 2,244.91 2,244.91 2,244.91
Market Share 50,000.00 70,000.00 92,000.00
Market Demand Rate 4% 9% 14%
Market Demand 2,000 6,300 12,880
Sales Revenue 4,489,829.27 14,142,962.21 28,914,500.52
Cost Per Tronn 1,538.00 1,538.00 1,538.00
Markup(30%) 461.40 461.40 461.40
Cost PESA 188.86 188.86 188.86
Markup(30%) 56.66 56.66 56.66
Price Per Bundle 1,726.86 1,726.86 1,726.86
Atlantic Computer Case Study Report

Total Server Cost 3,076,000.00 9,689,400.00 19,809,440.00

Net Income 1,413,829.27 4,453,562.21 9,105,060.52
Per Unit Profit 706.91 706.91 706.91
Breakeven Units 2,829.20    
R&D PESA Cost 2,000,000.00    
Gross Margin 31.49% 31.49% 31.49%
Total Profit 14,972,452.00

Table 4 Cost-Plus Pricing Strategy

The advantage is that there are no change in strategy, proven to be profitable, does better job of

factoring in the costs associated with the software development, more accurate representation of

what Atlantic Computers is selling with the basic server, force the Atlantic Bundle, ensuring that

the server is maximizing on its performance, lower price than the sale of four Zink servers. On

the other side, this strategy leaves money on the table (low revenue and difficult to cover costs).

And it has second lowest price per unit profit ($707). The revenue is not very high. In addition,

the breakeven point is a little bit high, and it’s hard to cover fixed costs.

Cost-plus pricing is determined by adding the direct, indirect and fixed costs associated with a

product and converting it into a per-unit cost for the product. A predetermined percentage is then

added to these costs to provide a profit margin. The cost of a Tronn server is $1,538 and based

on a $1,999.40 ($1,538+ 461.40) price, this additional markup is approximately 30%

($1,538*30%= $461.40). Adding 30% to the cost of PESA would make the price $188.86 (R&D

PESA Cost/ Half Number of the Market Demand= 2,000,000/(2,000+ 6,300+ 12,880)/2 ). As the

chart above shows, under the cost-plus method, the price of a Tronn loaded with PESA would be

$2,244.91 which is $518.05 ($2,244.91- 1,538-188.86) above the Zink server. Because we are
Atlantic Computer Case Study Report

looking at this conservatively, we will assume that one or two Tronn servers are the equivalent of

four Zink servers. Therefore, it would cost $4,489.82 ($2,244.91*2) as compared to $6,800 for

the 4 Zink’s price of servers. Again, It would be difficult for Atlantic to persuade customers to

purchase the servers based on the Cost-Plus pricing because customers would still only see that

they are getting two servers for $4,489.82 whereas they could get two Zink servers for $3,400

and that is $1,089.82 (=$4,489.82- 3,400) more expensive than Ontario’s Zink servers. Without

further justification, customers are not likely to accept this additional cost.

For the cost-plus approach, some assumptions will need to be made about the expected sales

volume, the PESA attach rate, the time period, and the margin. Given Atlantic’s production

constraints, the firm will only be able to produce a limited number of basic servers in the near

term. Assume that the firm will be able to sell all of the Tronn servers it can produce, and that

Atlantic’s resulting share of the basic server segment (in units) will be 4% in 2001, 9% in 2002,

and 14% in 2003. On these shipments, assume a 50% attach rate (i.e., half of all of their basic

servers sold will be loaded with the PESA) since this is an entirely new concept and some basic

servers are used for applications that will not benefit from PESA. Assume that Atlantic’s

software development costs for the PESA will be paid off over three years. Last, target a 30%

markup above costs.

Option 4 - Value-in-Used Pricing

Value-in-use pricing is a price strategy in which an attempt is made to capture a portion of what

a customer would save by buying a firm’s product. Price is set to provide customers with an

attractive savings after considering the life-cycle costs of acquiring, owning, using, maintaining,

and disposing of a product.

Atlantic Computer Case Study Report

In this case, we assume that there is a 50-50 sharing of the savings gain with the customer, and

always sell Thronn with PESA as a bundle. In addition, the average life of an Atlantic basic

server is estimated to be three years, so we focus on the conservative strategy. Under these

premises, we compare the cost of 2 Tronn against 4 Zink. The cost include electricity and

licenses fee. For the labor fee, the annual salary for a server administrator who can manage 40

servers is $80,000, so the labor fee per server is $2000. After the price add the expenses for 2

Tronn, the number is $10,000. Doing same thing for 4 Zink we got $18,800. At this point, we

can find that the customer value for 2 bundles is $8,800, based on 50-50 sharing rules the

company can get $4,400, one bundle for $2,200. At last, we add the $2,200 to initial price $2,000

to get the final price per bundle $4,200.

Figure 6 The Value-in-Use Comparison

Atlantic Computer Case Study Report

Aggressive Conservative

1 Tronn 2 Tronn 4 Zink

Price of $2,000 $4,000 $6,800

servers

Electricity $250 $500 $1,000

Cost of $750 $1,500 $3,000

licenses

Labor fee $2,000 $4,000 $8,000

Total price $5,000 $10,000 $18,800

Total $13,800 $8,800

Savings

50-50 $6,900 $4,400

sharing

Price per $4,200

bundle

Basic Segment Data

2001 2002 2003

Market 2,000 6,300 12,880

Demand

Cost per $1,538 $1,538 $1,538

server

Total Cost $3,076,000 $9,689,400 $19,809,440

Sales $8,400,000 $26,460,000 $54,096,000

Revenue

Net $5,324,000 $16,770,600 $34,286,560

Atlantic Computer Case Study Report

Income

Profit per $2,662 $2,662 $2,662

unit

Gross 63.38 63.38 7

Margin

Break- 1156

even units

R&D Cost $2,000,000

Total $54,381,160

Profit

Table 5 Value-in-Used Pricing Analysis

This strategy will bring high profit, and the price is moderate. Furthermore, this price associated

with the cost of operating the product, so it can reduce the pressure on the cost of the company

and avoid the damage from price war. However, the higher price than the competitor will cause

company loss price-sensitive customers, it needs more cost on integrated marketing

communications and training.

Recommendations and Conclusions

Price Per Bundle Revenue Total Cost Profit

Atlantic Computer Case Study Report

Option 1 $2,000 $42,360,000 $34,574,840 $7,785,160

Option 2 $6,800 $144,024,000 $34,574,840 $109,449,160

Option 3 $2,245 $47,547,292 $34,574,840 $14,972,452

Option 4 $4,200 $88,956,000 $34,574,840 $54,381,160

Table 6 Summary Table for Option 1-4

Atlantic Computer Inc. new product release should be handle as a Value-In-Use pricing strategy

to increase company’s profitability and provide an economic value to customers when buying a

Tronn server loaded with PESA software. Interested clients need to be fully aware of Tronn’s

performance when implementing PESA software tools. Value-In-Use strategy will let Atlantic

Computer gain some of Ontario’s market share only because customers will obtain the same

performance results by buying one Tronn server with PESA software tools rather than buying

four Zink basic servers. Even though, Atlantic Computer is marketing Tronn + PESA as a bundle

to take advantage of the competitors’ market. Tronn + PESA long-term sales will show that even

if Ontario Computer decides to upgrade Zink servers and include with it a software like PESA,

Atlantic Computer will be able to bounce back and provide its PESA software free of cost. By

implementing this strategy, Atlantic Computer will come across high customer-associates

interaction concerning price, performance, and quality compared to competitors. Before, during,

and after this product release, Atlantic Computer should train its support staff to comply with

customers questionnaire and emphasize how valuable will be for the clients to buy our product

over the competitors. Atlantic Computer should motivate its staff by creating monetary

incentives such as, high revenues = high employees commission.

Atlantic Computer Case Study Report

References

1. Best, R. (2014). Market-based management. Upper Saddle River, NJ: Pearson.

2. Stuart, W. (n.d.). Status Quo Pricing Strategy. Retrieved February 16, 2018, from

https://study.com/academy/lesson/status-quo-pricing-strategy-lesson-quiz.html

3. Business Dictionary. Retrieved February 16, 2018, from

http://www.businessdictionary.com/definition/competition-based-pricing.html

4. Neeraj Bharadwaj, John B. Gordon.(2007). Atlantic Computer: A Bundle of Pricing

Options.
Atlantic Computer Case Study Report

Figures

Figure 1 - Projected Market Volumes

Figure 2 - Performance Results

Figure 3 - Result Differences

Figure 4 - Product Line Stretching

Figure 5 - Product Life Cycle

Figure 6 - The Value-in-Use Comparison

Tables

Table 1 - Basic Segment Projected Demand

Table 2 - Status-Quo Pricing

Table 3 - Competitive-Based Pricing Analysis

Table 4 - Cost-Plus Pricing Strategy

Table 5 - Value-in-Used Pricing Analysis

Table 6 - Summary Table for Option 1-4