Atlantic Computer: A Bundle of Pricing Options

Problem Definition

        Atlantic Computer, Inc., a large manufacture of servers and high-tech products, was well known for its high-quality products in the computer industry. Currently, in the server market, there were two main segments including High Performance Servers and the Basic Servers. The High Performance Servers supporting complex applications captured the largest market share with 20% revenue and expectation of 200,000 unit sales in 2001, was projected to grow at about 3% annually in the next two years. In the contrast, the demand of Basic Servers next year was only around 50,000 units. However, it was forecasted, the compound annual growth of this segment would be 36% through the year of 2003. Atlantic had been competing in the server market with its premier product called Radia. Therefore, the company decided to develop and introduce the “Atlantic Bundle” that consisted of a new Basic Server called the Tronn and a software tool called the “Performance Enhancing Server Accelerator” (PESA). The advantage of the new Tronn server was that it could form up to four times faster than standard speed, hence helped customers save money from spending on buying four basic servers.

        The problem that Jason Jowers – the product manager of Atlantic had to deal with, was developing an optimal pricing strategy for the “Atlantic Bundle” that would help the company enter the new market that had been dominated by Ontario Computer with its Zink product line for a long time. Jowers had to come up with the plan before the SME (the Small and Medium-Size Enterprise System Solutions) trade show that would take place in two weeks.

Alternatives

Alternative 1. Status-Quo Pricing: Stick with company tradition by charging only for hardware and give the PESA software tool away for free: Offering customers the bundle by charging only for hardware implies that Atlantic provides more benefits than expected at a lower price. The product is called value-advantaged as it provides an expected excess value in comparison to the price. By pricing aggressively, Atlantic may gain large volume of sales and market share as customers would have incentive to purchase the product. However, it would lose opportunities of harvesting the value and fail to maximize profits. The company will lose PESA Software development costs for $2,000,000. Also, it will be difficult for customers to differentiate the “Atlantic Bundle” from Ontario Computer’s Zink servers.

Alternative 2. Competition-Based Pricing: Charge a price equal to what the customer would pay for four Ontario Zink servers: The “Atlantic Bundle” would generate sales of 4*$1700=$6,800 based on the price of four Ontario Zink servers. The price of $6,400 is much more profitable compared with the original price of $2,000, which makes it a value-disadvantage product as it is priced too high relative to the benefits it delivers. Atlantic will miss the opportunity of capturing customers’ attention and sell less units even though high price means high profit for each product.