Question 1: What price should Jowers charge DayTraderJournal. com for the ‘’Atlantic Bundle’’?
There are four pricing strategies where Atlantic computer can choose from. These strategies are: status-quo pricing, competition-based pricing, cost-plus pricing and value-in-use pricing. Each strategy has a calculation and a price outcome. Below I will describe all strategies and all advantages and disadvantages of that particular strategy.
In this case the Atlantic Computer company sticks to the tradition by charging only for the hardware, the Tronn server, and give the PESA software for free. This means that the selling price of $2,000 dollar per server remains. The Atlantic Computer company will use the margin of 30% to pay back the development cost of the PESA software. The price of the ‘’Atlantic bundle’’ would be in this case $4,000 dollar. The margin of the Tronn will decrease.
It is also possible that in this case it would appear that there are no difference between the Tronn server of Atlantic Computer and the Zink server of Ontario Computer. Customers will think that they still need to buy 4 Tronn servers to compare with 4 Zink servers, and buy Zink servers because they are with a price of $1,700 still cheaper compared to the Tronn server.
In the case of the competition pricing you will use the price of competitors to determine which sales price you are going to use. The price of the Zink server from Ontario computer is $1,700 dollar. Four Zink servers equals two Tronn servers with PESA software, the so called ‘’Atlantic bundle’’. So the price of four Zink servers, $6,800 dollar, also equals 2 Tronn servers with PESA software.
So the price of a Tronn server will be $3,400 dollar using the competition-based pricing. Customers will notice that there are no price difference anymore. The PESA software made the Tronn server attractive to a lot of customers but the software is not always working on all software applications. Customers than have to buy 4 Tronn server for twice the price of Zink servers. Customers would than consider not to buy the Tronn servers because they don’t see it as a fair price compared to the Zink servers.
In this case the price is determent by calculating all the costs, fixed costs included, and spread all the costs out of all purchased items. In this case you have to determine the number of purchases. In table 1, it is been calculated.
The total number of purchases in 2001 until 2003 is 21,180. Only 50% will use the PESA software, so about 10,590 units will carry the PESA software development cost of $2,000,000 dollar. That is a additional cost of $189 dollar to every sold makes the cost per server $1,727. With the markup of 30% we will have a price of $2,245. The price of a ‘’Atlantic bundle’’ will be $4,490. But again it is hard to show the customer that 2 Tronn servers cost $4,490 dollar while 2 Zink servers cost $3,400 dollar.
In the case of value in use pricing you will use the benefits that the customer will have from the products and use a 50-50 sharing of the savings that the customer will have.
So by using the Tronn server you will save $250 per server compared to the Zink server. Also the cost of software licenses is lower because, because using a Tronn you only need half of the servers. The labour cost of an server also decrease by half. Total cost of use of the servers is for 2 Tronn servers $10,000 dollar and for the Zink computer $18,800. A price difference of $8,800 dollar. By using the 50-50 price sharing the customer will have a price benefit of $4,400 dollar, and Atlantic Computer likes to benefit from that deal as well and will take $4,400 dollar will to the profit.
The price of the ‘’Atlantic bundle’’ will be $8,400 dollar, $4,000 dollar of the server plus the $4,400 dollar from the benefits. Value-in-use pricing the best method: From all the four price options this is the best one to choose. In table 2 you will see that this method will generate the highest profit. Because we show DayTraderJournal. com that they will get a lot of price benefits choosing the Tronn servers, instead of four Zink servers, they will likely choose for Atlantic Computer.
Question 2: How much money will be left on the table if the firm were to give away the software tool for free?
We calculate the total purchases of Tronn servers from 2001 till 2003. The total purchases will be 21,180. If the company were to give away the software for free, they choose the status-quo pricing. With the total purchases we can calculate what the profit will be. In table 2 you will see that the total profit will be $7,785,160 dollar. If you compare that to the best option, which is value-in-use pricing, and has a total profit of $54,381,160 dollar. By subtracting the status-quo from value-in-use, makes the total amount of money left on the table. This amount is $46,596,000 dollar.
Question 3: How are your intended customers likely to react to your recommended pricing strategy?
The chosen price strategy is value-in-use, the customer will have benefits in the form of savings. The Tronn servers will supply the basic segment. But with the development of the PESA software, the performance of the Tronn will increase, specially on e-mail applications, file sharing and web servers. It is possible that customers bought in the past a high performance server because that was the cheapest option, for the performance they needed. With the development of the PESA software, makes it a new calculation.
It could be that the Tronn server with PESA software is a cheaper option to some customers to please their needs. So the market volumes of the high performance segment will probably decrease and takeover by the Tronn with PESA software of the basic segment.