Atlantic Computer is a manufacturer of servers and other high-tech products. Following the growth of the internet there has been an increase of demand for cheaper, Basic Segment Servers. Atlantic Computer, currently having a 20% market share in the High Performance Server market, has decided to expand their product range and enter the Basic Segment market. Their response to the projected 36% compound annual growth in demand for Basic Servers has come in the form of the “Atlantic Bundle”. A Basic Segment server, called “Tronn”, with an innovative software tool. “Performance Enhancing Service Accelerator”, or PESA, which would allow the Tronn to perform up to four times faster than its standard speed. This case relates to the pricing of the Atlantic Bundle, focusing on the company DayTraderJournal.com.
In finding the optimal price for the Atlantic Bundle, we refer to four pricing methods, of which I shall name the benefits and disadvantages. These are status-quo pricing, competition-based pricing, cost-plus pricing and value-in-use pricing. Some basic figures:
Basic segment market demand in 2001| 50.000|
Basic segment market share for 2001, 2002 and 2003| 4 percent, 9 percent and 14 percent.| R&D investment required for PESA| $ 2.000.000,-|
Market price Tronn| $ 2.000,-|
Cost price Tronn| $ 1.538,-|
Tronn performance compared to Zink (segment leader)| 4x faster (2x from a conservative point of view).|
It is stated that the target market is seeking four basic servers. For providing consistency in the following pricing overview, the pricing shall be following that of four basic servers. Making use of the conservative method, this equals two Atlantic Bundles. As it does not improve performance by four times on every application, I shall make use of the ‘conservative method’ (two Tronn servers equal four Zink servers).
Status quo pricing: software goes for free.|
No pricing for PESA, therefore 2 x $ 2.000,- = $ 4.000,- for two bundles.| Market potential: 50.000 x $ 2.000,- = 100.000.000|
Advantages: low pricing, staying true to “software goes for free” tradition, offering only the bundled product.| Disadvantages: no notable marketing distinction from the competitors’ Zink, a net loss of $ 2.000.000,- on R&D, offering free software lowers the quality perception.|
Competition based pricing: price set in comparison to competitors’ performance (non conservative).| Four times Zink’s price: 4 x $ 1.700,- = $ 6800,- for two bundles.| Advantages: strong marketing claim, offering only the bundled product.| Disadvantages: people will be skeptical towards the marketing claim, product is not four times faster on all applications.|
Cost-plus pricing: price based on software tool’s development costs.| Total servers sold in 3 years: 21.180(0,04 x 50.000) + (0,09 x 70.000) + (0,14 x 92.000) Total sales with PESA: 10.590(50% attach rate)
Tronn cost server: $ 1.538,-
PESA cost per server: $ 189,-(2.000.000 / 10.590)
Cost price plus markup costs: $ 2245,10($ 1.538 + $ 189,- x 1.3)| Cost two bundles without PESA: 2x $ 1999,40 =
$ 3998,80| Cost of two bundles with PESA: 2x $ 2245.10 = $ 4.490,20| Advantages: clear and fair way of calculating price.| Disadvantages: offering the option to purchase Tronn without PESA would invite customers not to do so, low pricing and mediocre returns. |
Value-in-use pricing: price based on annual savings of the customer (conservative method).| Server savings(4 x 1.700) - (2 x 2.000) = $ 2.800,-
Electricity savings(4 x 250) – (2 x 250) = $ 500,-
License savings(4 x 750) – (2 x 750)= $ 1.500,-Total savings= $ 4.800,- (Of which PESA savings (two bundles needed instead of four Tronn’s)= $ 2.400,-) Total cost of two bundles (50/50 share)(0,5 x 4.800) + (4.000)= $ 6.400,-| Advantages: very strong marketing/sales pitch based upon customer...