Atlantic Computer, traditionally strong in high-performance servers, is launching a basic server named Tronn, targeted at the rapidly growing low-end server market. To differentiate, Atlantic developed PESA (Performance Enhancing Server Accelerator) — software that boosts the Tronn's performance by up to 4x.
Jason Jowers must recommend a pricing strategy for the Tronn + PESA bundle, considering value creation, market competition (mainly Ontario’s Zink), and internal R&D cost recovery.
⤷ Pricing Options and Detailed Calculations
Option 1: Status Quo (Give PESA Free)
- Tronn Price: $2,000
- PESA Price: $0
- Bundle Price: $2,000
- Pros: Easy to sell, improves market share
- Cons: No value monetization, low revenue
- Revenue = 0
Option 2: Competitor-Based Pricing
📌 Assumption:
2 Tronn + 2 PESA = 4 Zink (Performance equivalence)
📐 Calculation:
- 2 Tronn = 2 × $2,000 = $4,000
- 4 Zink = 4 × $1,700 = $6,800
- Δ = $6,800 - $4,000 = $2,800
- 2 PESA = $2,800 → PESA = $1,400
- Bundle Price = $2,000 + $1,400 = $3,400
- Revenue = 10,590 × $1,400 = $14.8M
✅ Pros: Good value capture
❌ Cons: Could face resistance in price-sensitive market
Option 3: Cost-Plus Pricing
📌 Formula:
Price = (FC/n) × (1 + margin%)
Where:
- FC = $2,000,000
- Margin = 30%
- Expected PESA sales (n) = 50% attach rate × total Tronn = 50% × 21,180 = 10,590
📐 Calculation:
- Cost/unit = $2,000,000 ÷ 10,590 ≈ $188.86
- Price = $188.86 × 1.3 = $245
- Bundle Price = $2,000 + $245 = $2,245
- Revenue = 10,590 × $245 = $2.5M
✅ Pros: Justifies price internally, covers R&D
❌ Cons: Leaves value on table
Option 4: Value-In-Use (100%)
📌 Formula:
New Product Price = Next Best Alternative + ΔBenefits – ΔCosts
Assumptions:
- 2 Tronn + 2 PESA = 4 Zink (performance)
- Electricity Savings = (4 – 2) × $250 = $500
- License Savings = (4 – 2) × $750 = $1,500
- Labor Savings = (4 – 2) × $2,000 = $4,000
📐 Calculation:
- Total Benefits = $6,800 + $500 + $1,500 + $4,000 = $12,800
- Minus 2 Tronn = $4,000
- 2 PESA = $8,800 → PESA = $4,400
- Bundle Price = $2,000 + $4,400 = $6,400
- Revenue = 10,590 × $4,400 = $46.6M
✅ Pros: Maximum value monetization
❌ Cons: Risk of market rejection due to high price
Option 5: 50% Value-In-Use
📐 Calculation:
- Half of Value = (Electricity + License + Labor Savings) × 50% = $3,000
- Total = $6,800 + $3,000 = $9,800
- 2 PESA = $9,800 – $4,000 = $5,800 → PESA = $2,900
- Bundle Price = $2,000 + $2,900 = $4,900
- Revenue = 10,590 × $2,900 = $30.7M
✅ Pros: Balanced value capture
❌ Cons: Pricing still higher than competitors
⤷ Pricing Options Summary Table
| Option | Tronn ($) | PESA ($) | Bundle ($) | Revenue (10,590 units) |
|---|---|---|---|---|
| 1. Status Quo | 2,000 | 0 | 2,000 | $0 |
| 2. Competitor Based | 2,000 | 1,400 | 3,400 | $14.8M |
| 3. Cost-Plus | 2,000 | 245 | 2,245 | $2.5M |
| 4. Value-in-Use (100%) | 2,000 | 4,400 | 6,400 | $46.6M |
| 5. Value-in-Use (50%) | 2,000 | 2,900 | 4,900 | $30.7M |
⤷ Final Recommendations
- Short-term market penetration → Option 3 (Cost-Plus) or Option 5 (50% Value-in-Use) for balance
- Long-term strategic value capture → Option 4 (100% Value-in-Use), if Atlantic can justify value via demos, trials, or ROI calculators
- Avoid Option 1, as it fails to monetize innovation and may devalue future enhancements
