ATLANTIC COMPUTER

1. Introduction and Problem Definition Jason Jowers, a newly minted MBA, had joined Atlantic Computer just four months ago as the youngest product manager. He would be responsible for developing the pricing strategy for the "Atlantic Bundle" (i.e., the new Tronn server and the PESA software tool), which had been developed specifically to meet an emerging basic server market, a new market to the company. But it had to compete with Zink server of Ontario Computer, its major rival in this market. 2. Situation analysis * External Analysis Since the basic server market had 36% compound annual growth rate through 2003, significantly higher than around 3% of high performance market, Atlantic Computer decided to penetrate the basic server market with its "Atlantic Bundle". But Atlantic Computer had no competitive market share in the basic market and had to fight against a strong competitor Ontario Computer which only focused on the basic server market with 50% revenue market share. In addition, for the business model of Ontario Computer that possessed the most flexible and innovative supply chain strategy was based on operational excellence, the company had been able to drive out many non-value-added costs and compete largely on price. For example, its major sales were generated online, saving lots of selling expenses. However, Atlantic Computer had already been a strong player with 20% of the revenue market share in high performance market, the largest market in servers industry and had also been the largest player in the overall server industry for 30 years, thus Atlantic Computer was able to support its competition in the new basic market with its financial advantages, technical advantages and any relevant successful experience derived from the high performance market. Whats more, Atlantic Computer didnt need to be worried that its basic servers would compete with its high performance servers, because customers didnt view these two kinds of servers as substitutes. Atlantic Computer had also targeted the web-server and file-sharing application segments benefited most from the tool. Beyond that, The Small and Medium-Size Enterprise Systems Solutions Trade Show was coming, so Atlantic Computer could take advantage of the show to collect immediate feedback, allowing Cadena to eventually develop a sales script and other marketing collateral. Additionally, value-in-use pricing prevailed in the United States and Europe and this pricing could increase the companys revenue, compared with its traditional pricing. * Internal Analysis Atlantic Computer was famous for providing top-notch, highly reliable products and high quality, responsive post-sales assistance, which could be a substantial buttress supporting "Atlantic Bundle" in the new market. PESA would allow the Tronn to perform up to four times faster than its standard speed and Zink servers performed at approximately the same level as Atlantics Tronn, which meant "Atlantic Bundle" performed up to four times faster than Zink servers did, leading to first-order savings effects from purchasing and second-order savings effects from operating expenses such as annual electricity charges, software license fees, and labor costs. But Jason Jowers might ignore the big picture by a professor saying and Jason hadnt still decided the pricing strategy yet. The greatest weakness concentrated on

selling activities of the company. First, Sales force had historically given away software tools, since the company put limited emphasis on developing and selling software tools that helped to enhance the performance of their servers. Second, traditionally, the Server Division had relied upon a high-touch direct sales channel at a higher cost than that of online sales. Third, the sales force compensation structure of 70% salary and a 30% commission was not so reasonable that it could spur the sales force to achieve excellent sales performance. 3. SWOT analysis Please refer to Appendix Exhibit 1. 4. Alternative courses of action (Please refer to Exhibit 2: Price and Est. sales of four Routes) 1. Stick with company tradition by charging only for hardware and give the PESA software tool away for free. 2. Charge a price equal to what the customer would pay for four Ontario Zink servers. 3. Charge a price based on a cost-plus approach to pricing PESA (based on software tools development costs). 4. Charge a price based on value-in-use pricing.

5. Recommendation The value-in-use pricing was generally welcomed in U.S. and Europe, because it was able to tell customers how much they could save on purchasing. Based on my calculation, purchasing one Atlantic Bundle could save $8,371.42 annually, thus it was reasonable for Atlantic Computer to share the savings gain with customers by fifty to fifty. Meanwhile the price $4,185.71 exceeded the cost-plus price $2,612.61including software tool cost. But calculating the savings depended on annual operating costs assumptions which differed by various customers; therefore the computer should set up widely accepted costs assumptions under scrutiny. Route 1-3 were not reasonable pricing. Route 1 shouldnt ignore software tool cost. Route 2 pricing was made by rule of thumb. $6,800 was too high to be accepted by customers. Route 3 pricing was more reasonable than the previous two, but in this case the consumer surplus should be $8,371.42. The company didnt take advantage of the consumer surplus by only charging $2,612.61 per server. I suggested the overall pricing objective should be market-penetration pricing to grab a maximum market share, considering the company was new in this basic market and higher sales volume will reduce fixed manufacturing cost and R&D cost per server, leading to economy of scale and higher longrun profit. The company should also study demand of the targeting markets File Sharing and Web Servers in terms of price sensitivity, demand curve and elasticity of demand and should build customer value, satisfaction and loyalty in order to adjust or enhance price after gaining significant market share and adapting servers to the market better. In addition, the company should study and integrate Ontario Computers successful experience such as operational excellence business model and the most flexible and innovative supply chain strategy with its highly reliable products and high quality, responsive post-sales assistance. For instance, the company should build online sales channels. Meanwhile it should cultivate the culture of weighing software tools and hardware equally and put more emphasis on commission percentage in the sales force compensation structure to encourage more sales. I expected the

most possible response of Ontario Computer to Atlantic Bundle would be price reduction. Based on the response, we should stick on our original price, showing our confidence in our high quality products and avoiding fierce price war which would hurt both of us. But at first, we should guarantee the perfect compatibility of the PESA software tool with the Tronn server by tracing the performance of Atlantic Bundle from customers and promptly improving Atlantic Bundle according to customers demand. 6. Conclusion Atlantic Computer was new in the basic market, thus its priority was to penetrate the market with Atlantic Bundle whose pricing should follow the tide value-in-use pricing, showing how much customers could save and reasonably exploiting the consumer surplus. At the entry beginning, it should consider fifty-fifty sharing rate or even lower forty-sixty rate, but after standing firm, customers getting used to Atlantic Bundle and Zink losing more and more market share, Atlantic Computer could increase sharing rate and benefit from economy of scale. In the short run, Ontario Computer must cut price to fight back Atlantic Bundle, but the company should stick on its original price on the basis of high product quality. Meanwhile, the company should study and learn any successful experience from Ontario Computer in the basic market and integrate that with its own core competency.

Appendix Exhibit 1: SWOT analysis INTERNAL | STRENGTHS | WEAKNESSES |

| * "Atlantic Bundle" four times faster than its standard speed * Reputation for providing top-notch, highly reliable products * Reputation for providing high quality, responsive post-sales assistance * Zink servers performed at approximately the same level as Atlantics Tronn * First-order savings effects from purchasing * Second-order savings effects from operating expenses | * Professor: Jason, you ignore the big picture at your peril * No pricing for the bundle yet * Limited emphasis on developing and selling software tools that helped to enhance the performance of their servers * Sales force had historically given away software tools * Relied upon a high-touch direct sales channel * Sales force compensation structure of 70% salary and a 30% commission | EXTERNAL | OPPORTUNITIES | THREATS |

| * "Atlantic Bundle" is targeting the basic server market with 36% compound annual growth rate through 2003 * A strong player (20% of the revenue market share) in high performance market, the largest market in servers industry, for 30 years * Also the largest player in the overall server industry. * Get feedback from SME * High performance servers and basic servers would not be viewed as substitutes by customers * The web-server and file-sharing application segments benefited most from the tool * Value-

in-use pricing prevailed in the United States and Europe | * Zink product line of Ontario Computer with only focus on basic server market claimed 50% revenue market share * No significant market share in the basic server market with 36% compound annual growth rate through 2003 * The majority of Ontarios sales were generated online * Ontarios business competed largely on price based on operational excellence business model and driving out many nonvalue-added costs * Ontario Computer had the most flexible and innovative supply chain strategy |

Exhibit 2: Price and Est. sales of four Routes | Route 1 Price | Route 2 | Route 3 | $4,185.71 | $37,312,000.00 | Route 4 | | $19,557,456.00 | |

| $2,000 | $6,800 | $2,612.61

Est. sales | $16,960,000.00 $26,227,410.40 |

Note 0: assume that the price of all Tronn-only units sold was the traditional cost-plus