A BUNBDLE OF PRICING OPTIONS
In this case, Atlantic Computer is a manufacturer of servers and high-tech products. Two market segments exist in the server industry: High performance and Basic Servers. Atlantic Computers has held a 20% share of the High Performance market with their Radia servers being their premier product. However, the market for Basic servers is growing and this has caused Atlantic Computers to develop and introduce a Basic Server called the Tronn and a software tool called the “Performance Enhancing Server Accelerator” (PESA). The Tronn was developed mainly for the emerging US market opportunity for basic servers. The PESA would allow the Tronn to perform up to four times faster than its standard speed and make frequently requested information more accessible. Thus, bundling the Tronn and PESA made more sense. Atlantic is not concerned that the Tronn will be considered a substitute for its High Performance servers.
What pricing strategy should Atlantic Computers implement to price the Atlantic Bundle?
There are four main types of pricing strategies which Atlantic Computers can choose. First, Atlantic Computers could stay with the status quo and offer software tools for free. Second, it could choose competitive based pricing. Third it could choose from Cost-plus pricing. Finally, it could choose value-in use pricing.
Status Quo Pricing
This option consider only the cost of server and treats PESA software as free product along with servers: Price of 1 Tronn Server:
2 Tronn Servers + PESA Software (Free) ($2000 x 2) Price of Atlantic Bundle =
Competition Based Pricing
Pricing the Tronn servers based on price of competitor server (Zink by Ontario) and PESA for free. Since 2 Tronn Server with PESA software is equivalent to 4 Zink servers: Price of 1 Zink Server 2 Tronn Server + PESA Software (4 x $1700) Price of Atlantic Bundle = $1700 $6800 $6800
Cost Plus Pricing
Market volume (in units) Market Volume of Basic Server Atlantic Share ( in %) Estimated Total Sale of Tronn Server Estimated Total Sale of PESA software (50% of Tronn Server Sales)
50000 4 2000
70000 9 6300
92000 14 12880
Cost of Tronn Software PESA Software Development Cost
Cost Plus Pricing
Price per server: Cost 30% Markup ($) Total ($) PESA Cost per server Cost per Tronn server 188.9 1538 56.658 461.4 245.52 1999.4
Pesa Cost per Server
= = =
Total Cost involved/ Total Estimated Sales 2000000/10590 $188.9
After the Markup 30%, as calculated in the above table: Cost of Atlantic Bundle = $2245
Value-in use Pricing
Considering 4 Zink server is equivalent to 2 Tronn server + 2 PESA software Cost Savings Saving in Electricity Software Licenses Labour Cost of Server Total As per value pricing model of 50-50% Price of PESA 2 Tronn + 2 PESA Cost of Atlantic Bundle Amount ($) 500 1500 4000 2800 8800 4400 8400 4200
Comparison: Projected Revenue and Profit for 3 Years
Particulars Estimated Number of Units over 3 years Price Per Atlantic Bundle ($) Total Revenue from Sales ($) Variable Cost per unit ($) Total Variable Cost ($) Fixed Cost for development of PESA ($) Total Cost (in $) Profit (in $) Status Quo 21180 2000 42360000 1538 32574840 2000000 34574840 7785160 Competition Based 21180 3400 72012000 1538 32574840 2000000 34574840 37437160 Cost Plus Approach 21180 2245 47549100 1538 32574840 2000000 34574840 12974260 Value in use 21180 4200 88956000 1538 32574840 2000000 34574840 54381160
On detailed comparative study of 4 different pricing approch for Tronn Servers & PESA Softwares, it is eveident from the above chart that Competition Based pricing is the most suitable option.
This approach takes into consideration...