1. Stick with company tradition by charging only for hardware and give the PESA software tool away for free. As can be seen in Exhibit 2, there is a noticeable difference between basic servers running with and without the PESA software. This difference would cater directly to those customers in the file-sharing application and web-server segments of the market. Currently, as the Tronn would be competing directly with the rival company’s Zink server, which is priced at $1,700 as opposed to the Tronn’s $2,000, customer’s would assume that the Zink is better value as it costs less, despite the fact that the price shows a 40% mark-up over Tronn’s 30% mark-up. By offering the PESA software tool as part of the overall package, Tronn could add a value advantage over Zink, as they do not offer a software tool which enhances the performance of the server. However, as aforementioned, the customers using the basic servers would benefit most from the PESA software, rather than the high-performance servers. According to Exhibit 1, the majority of units sold are those of the high-performance servers. 2. Charge a price equal to what the customer would pay for four Ontario Zink servers. The case states that Ontario’s Zink servers dominate the basic server segment, and therefore the introduction of the Tronn server would mean that the two companies would be competing directly against one another. Further, Ontario holds a supply-chain advantage over Atlantic, in that they ensure that their products are widely available to all consumers, e.g. the majority of their sales are generated online. However, when loaded with the PESA software, Tronn’s servers run at an efficiency of 4 times faster than their standard speed. The option suggests that the Tronn, when loaded with the PESA software, should be valued at four times as much as the Zink server, as it would be performing at the same standard. This would price the Tronn at $6,800. While a price this high would indeed generate revenue, it must be considered that the Tronn is a new product entering the market. Without appropriate marketing, the consumer would be unaware of the benefits of using the Tronn and thus would opt for the much cheaper option, Zink. This strategy is called skimming. In order to be successful, Atlantic would have to ensure that consumers are aware of the significant product differentiation between the Tronn and the Zink servers (i.e. The PESA software). 3. Charge a price based on a cost-plus approach to pricing PESA (based on software tool’s development costs). As stated above, the cost-plus approach is Atlantic’s standard pricing strategy. In the case, Atlantic is said to have production restraints and therefore will only be able to produce a certain number of Tronn servers in the near term. For example, if Atlantic can sell all of its projected units in the first three years, they are looking at selling 212,000 units in total. In the first year, the percentage of market share rises by 4%, meaning that the total number of Tronn servers sold was 2,000. In the second year, the percentage rises by 9%, giving a total of 6,300 servers sold. In the third year, this raises to 14% and 12,880 servers sold. Of these 21,180 servers, assume that only half are loaded with PESA software, giving us 10,590 servers with the software in total over the three years. The development costs of the PESA software totalled $2,000,000,000. In order to cover the development costs of the software in the first three years, Atlantic would have to price the software at $189. If we assume the Tronn server without the software costs $1,538 to produce, and the PESA is to be included in the sales price, we are looking at a $1,727 production cost. Adding a mark-up of 30%, the sales price of the Tronn and PESA (Atlantic bundle) would be $2,245.10. 4. Charge a price based on value-in-pricing.
In order to calculate a total savings price, it is necessary to...
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