MARKETING MANAGEMENT - II

Assignment
ON
“Pricing Strategy : Atlantic Computer Case”

PREPARED BY :-

DEBASIS PANDA 22202243

SAMBIT SWAIN 22202265
SMRUTI RANJAN PALAI 22202278
ARYA PUNYASHLOK 22202355
MAYURESH DASH 22202253

MBA (2022-2024)

UNDER THE GUIDANCE OF :-

Prof. JOYDEEP BISWAS

KIIT SCHOOL OF MANAGEMENT
Q1. Calculate the price of Atlantic Bundle (i.e. Tronn Servers + PESA Software
tool) based on the following pricing methods:
a. Status-quo Pricing.
b. Competition-based Pricing.
c. Cost-Plus Pricing.
d. Perceived Value or Value-in-use Pricing.
Answer 1 :-
a. Status-quo Pricing :-
$2000 is the established cost of a basic server.

Two Tronn servers with PESA installed on them were compared against four Ontario
Zink servers. Price of the Atlantic Bundle equals the Tronn price plus free PESA when
used against four Ontario Zink servers.
Atlantic Bundle Cost = Tronn Cost + Free PESA Software Cost = $2000

The bundle loses value if the lowest price is chosen, and the overall worth of the item
was not considered. It was necessary to forgo the $2,000,000 invested on R&D.

b. Competition-based Pricing :-Charge based on Competitor Pricing :-

Conservative Model :-

Two Tronn Servers equals Four Zinc servers (priced $1700 each)

Price of Atlantic Bundle = Price of 2 Zinc Server = 1700 * 2 = $3400.

Aggressive Model :-

One Tronn server equals Four Zinc servers (priced $1700 each)

Price of Atlantic Bundle = Price of 4 Zinc Server = 1700 * 4 = $6800.

Factors in a portion of the costs are associated with software development.

c. Cost-Plus Pricing.

Year 2001 2002 2003 Totals

 Market
50000 70000 92000
Volume

Market 4% 9% 14%
share of
Atlantic

Total sales 2000 6300 12880 21180

Estimated 1000 3150 6440 10590

PESA Sale
50%
Price of Atlantic Bundle = $2245.

Cost of Atlantic Tronn Server. $1538

Cost of PESA per Server. 2000000/10590= $189

Total cost of Atlantic Bundle. 1538 + 189 = $1727

30% Mark-up. 1727*0.3 = $518

Final Price. 1727 + 518= $2245

d. Perceived Value or Value-in-use Pricing.

Savings Information Two Zink Servers One Tronn Server

Electricity Savings 250*2 = $500 $250

Software License
Savings 750*2= $1500 $750

Labour Costs Savings 80000/40=2000*2=$4000 $2000

Cost of server 1700*2= $3400 $2000

Total $9400 $5000

Q2. Which pricing method should Jowers apply for DayTraderJournal.com? Why?
Answer 2 :-
Tronn Servers with PESA should cost $4,500 per machine, according to Jowers. The
status quo pricing model should be utilized at $2,000 if he intends to sell the servers
separately without using PESA. However, a $2,500 upcharge for adding PESA is
reasonable for both the consumer and the customer considering the boost and cost
savings possible for the consumer with PESA, which are $4,500 alone (after 50/50
share is computed), not including variable or fixed costs of manufacturing. The
calculations below demonstrate pricing considerations for each of the 4 ways and
support the proposed pricing. But since the business wants to bundle as many as
possible, they may even think about eliminating the choice to buy a device without
PESA entirely.

If this isn't practicable, it could be a good idea to think about branding the bundled and
unbundled products differently and selling them to various market groups (one for
Ontario's lower end, another for the upper end).

Q3. Think broadly about the top-line revenue implications from each of the four
alternative pricing strategies. Approximately how much money over the next
three years will be ‘left on the table’ if the firm were to give away the software tool
away for free (i.e. status-quo pricing) as compared to the other three pricing
methods?
Answer 3 :-
Status-quo Pricing :- The accepted practice in the sector is to simply include any
software tools with the hardware when determining the cost of a server and software
package. This pricing method has always been used by Atlantic Computers. For this to
happen, Atlantic Computers would have to give out the PESA software package along
with the Tron Server. In order to do this, Atlantic Computers would have to effectively
forfeit the $2,000,000 they spent on PESA's research and development. It would also be
challenging for Atlantic Computers to compete in and capture market share in the basic
server sector since the Tronn Server would seem to customers to be quite similar to the
Zink servers.

Competition based Pricing :- Pricing based on competition uses prices of rivals as a

standard for pricing items rather than taking costs into account. The cost of two Ontario
Zink servers is $1700, therefore the Tronn with the PESA software tool loaded is about
similar to two Ontario Zink servers. So, according to the Competition-Based Pricing, the
"Atlantic Bundle" would cost $1700 multiplied by two, or $3400. Although selling at this
pricing would increase Atlantic Computers' earnings, it is uncertain if customers would
really buy the "Atlantic Bundle" at this price. Customers would see that they were only
receiving two Tronn servers, which were four times as expensive as Zink servers.

Even if the PESA software tool would make the Tronn servers equal to 4 Zink servers,
not all software programmes are compatible with it. Customers would also need further
rationale for using just half of the hardware and taking the chance that one or both
servers would be down for an extended period of time. Based on competition-based
pricing, customers would probably not think about buying the "Atlantic Bundle" since
they wouldn't think it was a reasonable price and worth the risk.

Cost-plus Pricing :- Cost-plus pricing is calculated by multiplying the product's direct,

indirect, and fixed costs by the number of units the product is being sold. Then, to these
expenses, a set percentage is added to provide a profit margin. A Tronn server costs
$1,538; assuming a price of $2,000, the additional markup amounts to almost 30%. The
price of PESA would increase by 30% to $189. According to the figure below, a Tronn
equipped with PESA would cost $2,245 using the cost-plus technique, $545 more than
a Zink server. We will assume that two Tronn servers are comparable to four Zink
servers because we are approaching this conservatively. As a result, it would cost
$4,492 as opposed to the Zink server's $6,800 price. Once more, it would be
challenging for Atlantic to convince clients to buy the servers based on the Cost-Plus
pricing because clients would still only see that they are getting two servers for $4,492,
when they could get two Zink servers for $3,400, which is $1,092 more expensive than
Ontario's Zink servers. Customers are unlikely to accept this higher expense without
more explanation.

Value-in-use Pricing :- Atlantic Computers would calculate the value that each client
would receive from purchasing the product using the Value-in-use pricing approach.
Customer value may be described as the monetary value of the advantages that a
customer receives in exchange for the price they pay for a product. These benefits
might be technical, service-related, social, or economic. In this scenario, the annual cost
of power and software license for each server would represent the customer value. After
then, it would compute the difference between the two sums and presumptively split the
savings equally. When all costs are considered, employing two Atlantic Bundles rather
than four Zink servers might result in a $4,800 savings for the user, as shown in the
table below. The ultimate price after a 50/50 split would be $6,400. This approach
makes it simple to demonstrate to buyers the $2,400 savings they would experience
when purchasing two "Atlantic Bundles." This would aid in quantifying the customer's
actual value in purchasing the "Atlantic Bundle."
Q4. How is Matzer likely to react to your recommendation?
Answer 4 :-
Matzer, a 20-year veteran of the computer industry, would probably have some
concerns with Jowers' choice to price the Tronn + PESA product using a value-in-use
approach. Cost-plus pricing with largely free software tools has been the industry price
norm for many years. In actuality, Matzer and many executives at Atlantic never saw
software as a competitive advantage for their server products. They thus anticipated
they would not be able to convince users to pay for the software in addition to the
server's price.

Q5. How is Cadena’s sales force likely to react to your recommendation? What
can Jowers recommend to get Cadena’s sales force to understand and sell the
PESA software effectively?
Answer 5 :-
(i) Cadena's sales force would likely accept your advice to offer Atlantic Bundle for
$4200 per unit because of the company's compensation structure, which is 70% salary
and 30% commission (assuming that commission is based on sales and not on number
of units). In comparison to selling the bundle at $2000 per unit, selling the bundle at the
recommended price will provide almost twice as much commission.

(ii) It is customary in the sector to just disclose the cost of the server and the
software tool. But in this case, Atlantic Computers and its clients will both benefit most
from the software application. Therefore, it is crucial to explain to clients how much
money PESA may help them save. Charging a fair price for PESA is the only way to
effectively express this. Consequently, to educate Cadena's sales team on the benefits
of PESA and help them price it appropriately. Each salesperson should be familiar with
the mathematics used to determine the overall value that PESA may generate and how
the price of the programme is set by allocating a percentage of that value.

Q6. How are customers in your target market likely to react to your recommended
pricing strategy? What responses can be provided to overcome any objections?
Answer 6 :-
Customers would first object to the recommended pricing for Atlantic Bundle because
they would find the cost per server to be substantially higher (by a factor of two) than
that of Zink.

They would not choose to pay for the instrument since they are uninformed of its
possibilities.

The pricing model we utilized for DayTraderJournal.com will be an effective tool for
demonstrating the entire value produced by Atlantic Bundle in terms of cost savings on
operational tasks during the server's lifetime. Customers won't profit much from lower
acquisition costs, while PESA will benefit much from lower possession costs. Customers
will learn the advantages of buying the Atlantic Bundle and using it for a long time by
seeing servers with PESA installed on them. This will reduce the number of servers
needed to perform the purpose by half and result in cost savings.

Q7. How is Ontario Zink’s senior management team likely to react to the Atlantic
Bundle?
Answer 7 :-
Ontario's pricing is competitive. Ontario's anticipated response to our business plan will
be to further reduce their pricing. However, because of the high value of our products,
we can fight back and strive to achieve a larger market share. We can compete by
making labor and electricity savings.
 SUMMERY

Building Loyalty in Business Markets - Das Narayan Das (2004)

The article very precisely points out about how building customer loyalty in the
business to business market is different from the business to customer market.
Buyers in consumer market have similar wants, value of transactions are smaller as
compare to business to business market, and the scale of production is large .
Whereas in the case of the business market, there are fewer customers but
transactions are larger compared to consumer market. Saving money is the only
interest of customer .As there are different needs of different consumers in
business market grouping them or segmenting them for similar needs gets really
tricky or impossible sometime. As the article suggests the firm in business market
must communicate with individual consumers to have a clear understanding of
their needs Rather than putting them in groups.

The author of the article has divided the product’s benefits into four categories :
the first one is Tangible Financial Benefits, second Non- Tangible Financial
Benefits, third tangible non-financial benefits and the last one Non-tangible non-
financial benefits. Tangible benefits have values that can be easily communicated
by the sellers and verified by buyers. Non- Tangible Financial Benefits are those
which sellers can communicate but it is impossible for buyers to verify. According
to the author of this article a Pay-for-Performance contract is the most effective
way to provide the value of benefits across the customers. Tangible non-financial
benefits have values which is difficult for sellers to quantify or explain even
though buyers can perceive it. Nontangible nonfinancial benefits are those whose
values can neither be communicated by the seller nor perceived by the buyer. To
acquire customers, companies must strive to be at par with rivals on tangible
financial benefits and use tangible non-financial benefits to differentiate their
products in order to stand out from the chaos of the market.

The author lastly emphasized on how benefits to be linked with decision-makers

and communicate the values of your offering effectively to the consumer. Here
author talks about the loyalty ladder which is in the sequence to Grow the
relationship, promote word of mouth endorsement, resist competitors’
blandishments, pay premiums and collaborate. These behaviours can be thought of
as rungs on a ladder, with higher positions representing higher levels of loyalty.
When companies map customers’ locations on loyalty ladders and compare the
rewards of loyalty with the costs of managing customers, they usually find that
they have four kinds of customers i.e Commodity Buyers, Under performers,
Partners and Most Valuable Customers. In most business markets, customers don’t
show up in the shape desired by vendors. Organizations can build relationships by
investing time and money to migrate customers from one category to another
which would fetch profit for the company. As the case of the $3.7 billion electrical
parts distributor Wesco Distribution demonstrates, businesses need discipline to do
that.