Atlantic Computer is a well-known computer company that manufactures tech equipment and servers. As of now, the company has two markets, one is Traditional Servers, and the other is Basic Servers. The company has developed the Atlantic Bundle which consists of a new server, the Tronn, that will have a Performance Enhancing Server Accelerator. PESA is an added benefit due to its high-performance measures. Now, the main focus shifts on coming up with a pricing strategy for this new product. Jowers will take over the assigned task and come up with a price that will attract customers and maximize Atlantic Computers profits.
Jowers has narrowed down to four options:
1. Follow company tradition by charging customers the hardware and include PESA software tool for free.
2. Charge the same price that customers will pay if they bought four Ontario Zink servers.
3. Use the cost-plus approach to pricing PESA (based on software tool’s development costs).
4. Use the Value-in pricing approach.
After engineering a Pro Forma Income statement and Price Model Analysis, the results are evident that Value-in pricing approach will be beneficial to developing a price for Atlantic Bundle. With this suggestion, the company is capable of differentiating themselves in the market with the high-end server. Also, in order for them to get sales, it is imperative that the sales team trains their representatives on effective methods to utilize the value-based approach.
Out of the four options, option 4 is achievable. The value-in pricing approach enables the company to obtain a broad scope of what their customers are willing to pay for the product.
Earlier in the memo, we discussed that Jowers has considered following company tradition and charge the customer for the hardware and include PESA software for free. While this pricing strategy sounds beneficial for customers looking to obtain cost-effective servers, this low-price option will fail to capture the value of the product they are attempting to sell. In the case, it states that Research and Development are approximately $2 million. Regarding the calculations for the different price models, offering the PESA tool for free to costumers has a negative impact on Revenue and, this pricing strategy does not account for the cost of production to produce the server. As you can see, sales representatives will not benefit from this pricing strategy due to a low commission.
Another method that Jowers considered was charging the same price that customers will pay if they bought four Ontario Zink servers. There are pros and cons to this pricing strategy. Jowers has developed two proposals for this price structure. One approach is to charge customers 1 Tronn server that would be equal to 4 Zinc servers.
Exhibit 3 Exhibit 4
Since Jowers figured the management team was conservative with pricing, his second approach price 2 Tronn servers that would...