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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.
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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 determine the calculations of a few other items. Also, in these calculations, we will assume that the Tronn server is valued at $2,000. Firstly, considering that one Tronn server loaded with the PESA software is performs to the same standard as four Zink servers, it can be said that a saving of $1,600 per annum can be had by purchasing just one Tronn as opposed to 4 Zink servers. Secondly, annual electricity savings are equal to $250. Third, the cost of application software licenses is equal to $750 per year. Finally, if a server administrator earns $80,000 per year and the number of servers one can manage is 40, labour cost savings are $2,000 per year. The total savings can be added to achieve $4,600 per year.
In a quick summary of the above, the following can be noted: * In Option 1, the price of the Tronn and PESA software tool would be $2,000. * In Option 2, the price of the Tronn and PESA software tool would be $6,800. * In Option 3, the price of the Tronn and PESA software tool would be $2,245.10. * In Option 4, the savings of purchasing the Tronn and PESA software tool would be $4,600. I believe that Option 1 would not be an intelligent strategy for Jowers to use. Without charging for the PESA software, the company will find themselves struggling to pay off the costs of developing the tool in the first place.
This means they would have to sell more units in the first three years than what they originally projected, giving the company unrealistic sales assumptions and in my opinion, they would ultimately suffer profit losses. I also consider Option 2 to be a bad choice of strategy. While one Tronn server, in conjunction with the PESA tool can indeed perform to the power of four Zink servers, it would be foolish to price the Tronn at the equivalent of this. A price of $6,800 for just one server is too much for a consumer to consider paying, especially for a product that is new into an already established market. Serious marketing and clear differentiation would be required to ensure the success of this strategy, both of which can be very time-consuming and costly.
While Option 4 shows a significant number in savings, I would recommend that Option 3, the cost-plus pricing strategy be used in launching the Atlantic Bundle into the basic-server consumer market. As stated in the case, Atlantic Computers is already a strong player in the high performance servers segment, but due to the consistent growth of the internet, the new market of basic servers is emerging. Jowers discovered that one of the main reasons that Atlantic succeeded in the high performance severs market was by product differentiation.
This is a large factor in the Tronn’s appeal to the basic server segment, as it also comes with the PESA software tool, something that Zink computers does not have. However, Ontario Computers competes mainly on price, due to the fact that they are able to sell their products online and therefore cut costs in other areas. Despite this, I believe that with Atlantic emerging into the market with a superior product, they will be able to compete successfully. According to Atlantic Computers general consensus, they do not usually charge extra for software tools. However, the importance of the PESA tool must be made known to the sales force.
Firstly, without charging extra for the tool, the company will struggle to generate enough revenue in the first three years to pay of the development costs of the product. Furthermore, Jowers followed the status quo and used cost-plus pricing to determine the value of the software, and after adding that cost onto the production costs of the Tronn itself and also adding a 30% mark-up, the total bundle only cost $245.10 more than the Tronn would cost on its own.
Emphasis should also be put on the fact that one Tronn server loaded with the PESA software tool, which was valued at $2,245.10, performed to the equivalency of four basic Zink servers, which in total would be valued at $6,800. This shows a $4554.90 saving for customers who choose to purchase the Atlantic Bundle over the required four Zink servers for the same performance. With Jowers given the opportunity to talk with prospective buyers at the trade show, he will also have the chance to explain the features and benefits of purchasing the Atlantic Bundle himself as well as obtaining firsthand consumer feedback on the products.
According to the case, the CEO of Ontario Computers states, “Our business model is not to be the leading innovator on product technology. Rather, our business model is to provide leading technology to customers via the most flexible and innovative supply chain strategy possible”. The company achieved this by managing to cut their costs through distributing their products online and thus were able to offer their product for a much cheaper price than Atlantic Computers.
In retaliation to the introduction of the Tronn in the market, Ontario Computer will most likely continue to base their business model on operational excellence and continue to search for ways to compete on price. Another consequence could be the company developing a software tool of their own to compete directly with the PESA tool. If this was to happen, it could pose a threat to Atlantic Computers in that Ontario would still most likely be capable of competing on price, giving them the competitive advantage. However, if Atlantic manages to establish their brand before their competition gets a chance to retaliate, they should have no problem holding onto their market share and consumer segment.
Atlantic Computers Case Analysis. (2017, Feb 27). Retrieved from https://studymoose.com/atlantic-computers-case-analysis-essay
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