Atlantic Computers Case Study

Part I

Atlantic Computer had several issues when releasing their new product the Tronn and Performance Enhancing Server Accelerator to the emerging U.S. marketplace. The first problem was the type of pricing model to be used when calculating the cost for the machines. The second problem I see is who are their target audience and the customers' response to the pricing. The third problem is how to market the "new" product.

Part II

One of the biggest problems after reading this case was identifying the different pricing strategies used by Jason Jowers. The article mentions four different types of pricing strategies. The first one is the Status Quo Pricing, which was the industry norm for pricing a server, and software bundle is to merely include any software tools with the hardware. Atlantic Computers has always practiced this pricing strategy.

This would require Atlantic Computers to offer the PESA software tool for free with the Tronn Server. This would make the price of two "Atlantic Bundles" $4,000. This would require Atlantic Computers to essentially lose the $2,000,000 cost of research and development of PESA. Furthermore, because Atlantic Computers would be giving PESA away, it would appear that there are no substantial differences between the "Atlantic Bundle" and the Zink servers and hence it would make it difficult for Atlantic Computers to compete with and gain market share in the basic servers segment.

The second pricing model mentioned is Competition-Based Pricing. Competition-Based pricing uses prices of competing products as a benchmark instead of considering own costs or the customer demand. The price of Ontario's Zink servers is $1700 and conservatively speaking, two "Atlantic Bundles" is equivalent to four of Ontario's Zink servers. Therefore, under the Competition-Based Pricing, the price of two "Atlantic Bundles" would be $3400 x 2 or $6800. While selling at this price would generate more profits for Atlantic Computers, it will be difficult for Atlantic Computer to differentiate their product in the market and they will have a tough time convincing the customers of the PESA advantage.

The third pricing model is Cost-Plus Pricing. Adding the direct, indirect and fixed costs associated with a product and converting it into a per-unit cost for the product to determine cost-plus pricing. As the chart below details, under the cost-plus method, the price of a Tronn loaded with PESA would be $2,246, which is $546 above the Zink server. Because we are looking at this conservatively, we will assume that two Tronn servers are the equivalent of four Zink servers. Therefore, it would cost $4,492 as compared to $6,800 for the Zink servers.

The fourth pricing model is value-in-use pricing. This is a method of setting prices in which an attempt is made to capture a portion of what a customer would save by buying a firm's product.

In order to decide which pricing strategy to use, it is best to identify and use the basic server needs of a model customer. In this case, DayTraderJournal.com will be used as the model customer. DayTrader.com is seeking four basic servers for their new website where day traders will be able to review articles and relevant training information. Their top requirements for a basic server purchase are to minimize initial purchase costs, minimize possession costs and allow their website to process many information requests. Because Matzer, the head of the server division, is conservative in his estimate of the power of the "Atlantic Bundle" we will assume that two "Atlantic Bundles" is the equivalent of four Ontario Zink servers.

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