Case Analysis - Atlantic Computer – A bundle of pricing options
Introduction – Atlantic computer is the largest player in the hi-tech IT hardware industry and a major player in the server market. Based on the fast growth of the internet and with it the proliferation of corporate websites and file sharing systems, huge demand is predicted in the basic server segment market over the next few years. In order to make the most of this opportunity, Atlantic has come put with a new product called Tronn, which when combined with the PESA software, would far outperform any of the comparable products available in the market. Atlantic now has to come up with an effective pricing strategy to successfully capitalize on this opportunity and at the same time overcome strong competition from Ontario Computers, the market leader in the basic server segment.
Pricing and positioning of the Atlantic bundle – To make an informed decision regarding the pricing decision the Atlantic bundle, below is an analysis that calculates the pricing of the Atlantic bundle based on the cost of each individual component that goes into the overall solution that the customer is looking for.
Apart from the onetime cost of procuring the server and the software licenses, the total cost of maintaining the server includes the cost for electricity, cost of the system administrator. Also all these costs are dependant of the total number of servers that are running in the organization. Based on exhibit 1 and 3, these costs are shown below
|Input information (From exhibit 1 and 3) | |Selling Price of 1 Atlantic Server |2000 | |Selling Price of 1 Ontario Server |1700 | |Development cost of PESA Software |2000000 | |Administrator Annual Cost for 40 basic servers |80000 | |Electricity cost per server |250 | |Licence cost per server |750 |
Two scenario’s for determining pricing strategy – For making an effective pricing strategy, rather than focusing on the cost of acquisition (the price of the server), Atlantic should focus on the total cost of ownership and the value created by using the product. Value can be defined as the difference between the cost of the product and the highest price that the customer is willing to pay. Atlantic can price the server at any price in this range as it is passing some of the value in the form of cost savings to the customer.
Note - For the purpose of this case, we can determine pricing for two scenario’s based on the total life of the server.. One where the system has to be replaced after one year (Scenario 1) and one where the system is used for three years (Scenario 2) and the costs of the system are spread out correspondingly.
Unit cost of the PESA software per unit
To determine the cost of the PESA software that should be attributed to the Atlantic bundle, we must find out the cost price of the software per each individual unit.
From exhibit 1, we can see that the total market for the basic servers in year 1 is 50000 units and in all the three years is 212000 units. Assuming that PESA wants to aim for leadership position in the basic server segment, we can assume that it should aim to capture at least 30% of the total market with the Atlantic bundle. Hence we can spread the cost of development of the RESA software over 30% of the total basic server demand, i.e. 15000 units and 80000 units respectively.
|PESA Software - Selling Price Determination | |Software development costs |2000000 | |Basic server market for 1 year |50000 | |Target basic servers to be sold in one year...
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