Develop a pricing strategy for ¶Atlantic bundle· - the new Tronn server and the PESA(Performance Enhancing Server Accelerator) software tool before SME trade show
Atlantic Computers is a manufacturer of Servers and High-tech products
owers joined the Company four months back and he was responsible for thepricing strategy of the ´Atlantic Bundleµ i.e (A package of the Tronn server and PESAsoftware tool)
The Tronn was developed mainly for the emerging US market opportunity for basic webservers
The ´Performance Enhancing Server Acceleratorµ (PESA) would allow Tronn toperform four times faster than its usual speed for standard procedures and hence thebundling made sense
Existence of 2 market segments - High Performance and Basic Servers
Atlantic has 20% market share in High Performance Servers with Radia being premierproduct over 30 years
An emerging market for basic servers is coming up in the late 1990s
Decided to introduce the Basic server into the market by 2000 with the belief that it won·t be seen as a substitute of the High Performance Servers
Advantages of PESA & Tronn
PESA ² will improve Tronn speed by 4 times
eed to purchase fewer servers
ower annual electricity charges
ess software licensing fee
ess labor costs
Customer segments which will gain advantage by using PESA ² Customers in web server& file sharing application segments
Atlantic Computer developed a product, the “Atlantic Bundle”, to meet an emerging basic server market. The Atlantic Bundle is a Tronn server coupled with the Performance Enhancing Server Accelerator software tool “PESA”. Atlantic Computer must decide on the pricing strategy. Situational Analysis
The external analysis is as follows:
•Customers: The first customer identified has a primary need to host websites, “Web Server” customer. The second customer identified has a primary need for file servers that help layout designers share graphic, text, and layouts, “File Sharing” customer. Customers in these segments appear to be the ones that will benefit the most from the PESA tool.
•Competition: The primary competition in the market is Ontario who claims 50% of revenue market share with the remainder of market comprised of many smaller venders (external threat, Appendix A). Ontario’s business model focuses on driving out non-value added costs and competing largely on price (value pricing). Its products are sold primarily through the internet.
•Collaborators: The server division relies upon a high-touch direct sales channel at a higher cost than that of online sales. Sales reps receive 70% salary and 30% commission. •Context: The largest segment of the server industry is the high performance server segment. The segment is expected to demand approximately 200,000 units next year and is expected to grow at approximately 3% annually over the following two years. The basic server segment is a newer segment with strong forecasted growth of 36% (external opportunity, Appendix A). The segment will comprise approximately 20% of total units sold next year at 50,000 units. By the third year of the forecast, the basic server market will make up approximately 30% of total units sold.
The internal analysis is as follows:
•Company situation: Atlantic is a well-established company with over 30 years of experience in the server market. The company is known for providing top-notch, highly reliable products and high quality, responsive post-sales assistance (internal strength, Appendix A). Atlantic has focused on selling high-end performance servers to large enterprise customers. The “Atlantic Bundle” was developed to assist the company in emerging into the basic server segment. The product was created to produce a basic server without creating a substitute product to the high performance servers. However, the logic seems flawed as customers would not have viewed the basic server as a substitute to the high-performance servers (internal weakness, Appendix A). In the past, Atlantic’s sales force gave away software tools.
•Relative market/competitive position: Ontario’s Zink server performs at approximately the same level as Atlantic’s Tronn. Even without the built-in PESA R&D costs the Tronn was priced higher relative to the Zink. Hence, the target market was narrowed to include customers that require more than one server. PESA allows the Tronn to perform up to four times faster than its standard speed. The “Atlantic Bundle” will allow companies to reduce the number of basic servers they must purchase and reduce operating expenses such as electricity charges and software license fees. Mr. Matzer indicated the “Atlantic Bundle” is the sale they want.
•Results: The gains to customers from the PESA software tool were examined and it was found that the Web Server and File Sharing application segments will benefit the most from the tool. The conclusion was based on the benefit to customers of being able to purchase fewer servers and the resulting savings (internal strength, Appendix A).
•Challenges: The primary challenge will be to address whether Atlantic will be successful utilizing its commissioned sales force rather than online sales. Another problem arises in how to motivate the sales force and the training required to sell the “Atlantic Bundle”. Finally, software has historically been given away which appears to be the industry norm. Charging for software may alienate customers (internal weakness, Appendix A). Alternative Courses of Action
Free PESA Software with Purchase. Rather than regarding the PESA R&D as a sunk cost, I chose to distribute the costs to every server. The price under this route was determined to be $2,122 (see Appendix B). The primary drawback is that a customer who would have normally purchased the Tronn without the software would be charged a higher price ($2,122 vs. $2,000). Continuing with the tradition and norm of free software, staff would not have to be retrained and customers will not feel alienated. Furthermore, the one-bundle price could easily be transitioned to on-line sales, and the low price will increase market share. The “free” software could create an illusion of low perceived value. Finally, the lower price will result in lower profit margins, and it does not take into consideration the value advantage received by the customer.
Competition Based Pricing. The price under this route was determined to be $3,400 (see Appendix C). Under this route, the company will earn more profit per bundle sold. Additionally, minimal effort is required to determine the price. However, the competition based pricing creates indifference between the “Atlantic Bundle” and its competition. The higher price will also reduce market share and could stir a pricing war. Cost-Plus. The price under this route was determined to be $2,245 (see Appendix D). Atlantic would gain market share under this route as the price is low relative to the benefits the customer receives. Additionally, the pricing will remain the same for the next three years. This approach does not take into consideration the value advantage received by the customer. Also, it results in lower profit margins per bundle sold. Value-In-Use.
The price under this route was determined to be $3,200 (see Appendix E). The primary benefit is that the approach is customer focused. The price is justified and the customer will perceive higher value for the price. Higher margins will also be earned. However, Atlantic will lose market share under this route at the higher price. Additionally, staff would have to be extensively re-trained and motivated. Customers who primarily purchase online may be reluctant to sit through “We can save you money!” sales pitches.
The company should proceed with the free PESA software route. The primary benefit is that the company will be able to initiate online sales which will reduce training costs, salaries, and commissions and will make up for the lower profit margins earned. One primary drawback is a customer will be charged a higher price even if they do not require the PESA tool. However, the target market has been narrowed to include customers that require more than one server, because it is unlikely that a customer who requires only one server will purchase the Tronn over the Zink. The most likely response from Ontario is to lower the price of the Zink to remain competitive. At the low price of $2,122, Ontario would have to lower Zink’s price to less than half of the price of the Tronn to fight for market share from the target market. Finally, the lower price feeds into the market-penetration strategy to maximize market share. The issue of perceived low quality can be disregarded as customers have proven the low-cost strategy utilized by Ontario has not affected their opinions on quality.
The free PESA software will allow the company to compete on the same level as Ontario through price and online sales without having to retrain employees, stray from the general rule of providing free software, or introducing sales pitches to customers who will likely be reluctant to take part. The low, competitive price will support market penetration and favor Atlantic should Ontario reduce its prices.