Individual’s Assignment
Atlantic Computer: A Bundle of Pricing Options

As Atlantic computer was largest manufacturer of servers and other hi-tech product, Jason Jowers has been assigned the task of developing the pricing structure for the Atlantic Bundle, a unique combination of the TRONN server along with the software tool - Performance Enhancing Server Accelerator – called PESA. The TRONN server has been specifically designed to address the current US market demand. In conjunction with the PESA, the TRONN ‘s performance capacity is four times faster than standard speed. Atlantic has continued to hold a significant portion (20% revenues) of the high-performance sector, but as the continual growth of the internet reached new heights, the demand of a basic server increasing rapidly. Hence, in order to meet the demand of market, the Atlantic company is planning to launch a basic server TRONN with a software tool PESA which will grow up the efficiency of server approximately four times.

First of all, apart from choosing the suitable pricing method for Atlantic computers, the broad of this company also need to consider about the lifecycle of their product. Basing on the case of IBM HTTP Server or The server products of Microsoft, it seems that the lifecycle of high tech products is decreasing rapidly nowadays. According to some experts in this field, they believe that the average life expectancy of these products is around 3 or 4 years depending on many factors which include the reaction of their competitors.
In addition, because of the limitation of possibility of producing, we assume that the Atlantic firm will be able to sell all the servers it can create at the highest price in the first 3 years (and now, we are in October 2000). Based on the information of the report, we can estimate the total number of Tronn servers (in units) during the 3 years resulting by share of basic servers segment :
| |Year 1 |Year 2 |Year 3 |Total |
|Basic servers (in Units) |50,000 |70,000 |92,000 | |
|Share ( in %) |4 |9 |14 | |
|Sale of Tronn server ( in Units) |2000 |6300 |12880 |21180 |

As considering the 4 method of pricing, we can see that:

- Stick with company tradition:

• Price of one Tronn Server = $2000

• 2 Tronn Servers + PESA for free = $ 4000

• Total Price of 2 Atlantic Bundles to Daystradeyournal.com = $ 4000 ( Per Atlantic Bundle = $ 2000

- Competition – Based Pricing:

• Price of one Zink Server = $1700

• 2 Tronn Servers + PESA software free = 4*$1700 = $ 6800

• Total Price of 2 Atlantic Bundles for Daytradejournal.com = $ 6800 ( Price of 1 Atlantic Bundle = $ 3400

- A cost-plus approach:

• The PESA software development = $ 2000000

• Cost of Tronn Server = $ 1538

• Total sale of Tronn servers sold in 3 years: 21180 (Unit)

• Total Sale of PESA software (50% of Tronn Server Sales): 10590 (Unit)

• PESA Cost per server = $ 2000000 / 10590 = $ 188.86 (with 30% Markup = $ 56.658 ( Hence, total PESA Cost per server is $ 245.518)

• Price of Tronn without PESA installed is $ 2000, therefore, the Price of Tronn with PESA installed is $ 2245.518 or $ 2246.

- Value-in-use Pricing:

| |2 Tronn servers |4 Zink servers |
|Price of server |$ 4000 |$ 6800 |
|Electricity |$ 500 |$ 1000 |
|Software License |$ 1500 |$ 3000 |
|Total Price |$ 6000 |$ 10800 |
|Savings |$ 4800 |
|Total Final Price |$ 6400 ( Per Atlantic Bundle = 4200 |

Therefore, the price in use method can generate more profits per unit than others. It is also easy to persuade the customers to choose as it shows that they can save $2400 when buying 2 Atlantic Bundles. In other words, the price is more justified and this will allow Atlantic Computers to maximize their profits. Moreover, it shows that this method is Customer – focused compared to the Company – focused in the third strategy:

| |Method 1 |M 2 |M 3 |M 4 |
|Number of Units |21180 |21180 |21180 |21180 |
|Per Atlantic Bundle |2000 |3400 |2246 |4200 |
|Total Revenue |42,360,000 |72,012,000 |47,570,280 |88,956,000 |
|Cost per unit |1538 |1538 |1538 |1538 |
|Valuable cost per unit |32,574,840 |32,574,840 |32,574,840 |32,574,840 |
|Fixed cost |2,000,000 |2,000,000 |2,000,000 |2,000,000 |
|Total cost |34,574,840 |34,574,840 |34,574,840 |34,574,840 |
|Profits |7,785,160 |37,437,160 |12,995,440 |54,381,160 |

And the estimated profits during the first 3 years with price – in – use method as it bring the highest price to the company:

| |Year 1 |Year 2 |Year 3 |
|Number of Units |2000 |6300 |12880 |
|Total Revenue |8,400,000 |26,460,000 |54,096,000 |
|Cost per unit |1538 |1538 |1538 |
|Valuable cost per unit |3,076,000 |9,689,400 |19,809,440 |
|Fixed cost |2,000,000 |2,000,000 |2,000,000 |
|Total cost |5,076,000 |11,689,400 |21,809,440 |
|Profits |3,324,000 |14,770,600 |32,286,560 |

After reaching the highest profits, the price of Tronn server may drop rapidly and the Atlantic computer need to develop new product to replace the old one.