Introduction (Background and Situation) Augustine Medical, Inc. was founded by Dr. Scott Augustine, an anesthesiologist from Minnesota, in 1987. The company was created to develop and market products for hospital operating rooms and postoperative recovery rooms. The company provides innovative solutions to combat postoperative conditions such as hypothermia. Medical research indicates that 60 to 80 percent of all postoperative recovery room patients are clinically hypothermic.
Hypothermia is caused by a patient’s exposure to cold operating room temperatures that are required by surgeons to control infection, and for the personal comfort of the surgeon. Hypothermia can also be a result of heat loss due to evaporation of the fluids used to scrub patients, evaporation from exposed bowel, and breathing of dry anesthetic gases. Dr. Augustine’s personal experience in the operating room convinced him that there was a need for a new system to warming patients after surgery.
Dr. Augustine also realized that the market for this new product would be enormous! Statistics indicate that approximately 21 million surgical operations are performed annually in the United States, and that approximately 5, 500 hospitals have operating rooms and postoperative recovery rooms that include 31, 365 postoperative recovery beds and 28, 514 operating rooms. Upon the realization of this need and existence of the market, Dr. Augustine went on to develop The Bair Hugger Patient Warming System then he acquired a patent.
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The Bair Hugger Patient Warming System consists of a heat source and a separate disposable warming cover that directs a gentle flow of warm air across the body. The Bair Hugger heat source uses a reliable high efficiency blower, a sealed 400 W heating element, and a microprocessor based temperature control to create a continuous flow of warm air. The heat source complies with all safety requirements for hospital equipment. Augustine Medical, Inc. was able to find investors that contributed to the initial capitalization of $500, 000.
These initial funds that were collected were used for staff support, facilities, and marketing. The funds were also used to cover the fixed costs of the company while in its first year. The company subcontracted the production of the heater / blower unit and manufactured the warming covers in-house. The company only participated in minor assembly of the product. Augustine Medical Inc.
planned for The Bair Hugger Patient Warming System to be sold by and through medical products distributors in various regions across the country. Distributors would call on hospitals, demonstrate the system, and maintain inventory of the blanket. The distributors were paid a margin of 30 percent on the heater / blower unit and 40 percent on the blankets. The estimated direct cost of each heater / blower unit was $380 and $0.
85 per blanket. The major issue that the company was faced with is how they should list the price to hospitals. The company’s major concerns with price was that the impact it would have on the rate at which prospective buyers would purchase the system, which would in-turn negatively or positively effect the cash flow of the company. The company was also concerned with preparing price literature for its distributors and for trade shows. Price is a very sensitive issue for the company because the level of competition and other similar product offerings that exist in the market. There are a number of products that can be considered direct competitors with The Bair Hugger, but only two of the products have direct similarities but are not sold in the United States.
With this in mind, Augustine Medical Inc. has a competitive advantage in the U. S. market because they have distinct product offering. This could give them further flexibility when choosing their pricing strategy based on how well their product is positioned.
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The average price range of competitive products is $3000 to $5000. Augustine Medical Inc. should use a price skimming strategy upon entering the market. A price skimming strategy will allow them to charge a relatively high price while entering the market for a short period of time and later lowering the prices when the company is stable.
By charging a high price initially the company can build high quality image for its products. Charging high prices will give Augustine Medical the option of lowering its prices when heavy competition arrives. This strategy would also be advantageous to the company upon its initial entry to the market because it will allow the company to regain profit margins from the funds paid to distributors and other intermediaries. This strategy will eliminate the risk of discounting and losing potential profits because the product will be marked up initially and “discounted” upon the arrival of competition and the growth stage of the products life cycle.
Because prices of competitive products are priced high, using a skimming strategy will not pose a threat instead could prove to be more advantageous in the long run. SWOT AnalysisStrengthso Simplicity of use Compatibility with existing system so Bair Hugger stops warms patience faster o Patented plastic cover Bair Hugger has 15 year life spa no Heater / blower unit is subcontracted to cut costo Water free heating alternative to avoid leakage and burns caused by traditional product so Prevents cross-contamination o Patients are not required to move or adjust in anyway to use device o Free Trial of product for 2 weeks Weaknesses Augustine Medical is not a recognized company so there is limited brand recognition o The Heater/Blower unit is not patented o New to the marketOpportunitieso 21 million surgical operations have operating rooms and postoperative recovery room so 5, 500 hospitals with operating and postoperative room so More than 10 million patients experience discomfort and instability associated with post-operative hypothermia o 60-80% of patients experience post-operative hypothermia o Anesthesiologists are dissatisfied with the current technology for treating hypothermia o U.
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S. does not have an established warm-air technology blanket market Networking opportunities and contracts at trade showsThreatso Climator, a foreign made product, could enter the U. S. market, capturing the first mover advantage and a large percent of market share early Most hospitals already have established methods for prevention and treatment of hypothermia such as: Surface Warming: o Warmed hospital blanket so Air-circulating blanket so Thermal drape so Infrared heating lamp so Partial water immersion o Increasing room temperature Internal Warming Heated and humidified inspired air Warmed intravenous fluid so Drug therapy o Hospitals have incurred costs for current methods of hypothermia treatment Substitute products: water blankets, lamps, and thermal drape so Not properly pricing and positioning their product Issue Identification Determining a competitive price for The Bair Hugger Warming System that will allow Augustine Medical Inc.
to maintain a constant revenue flow and long term profitability as well as repeat customers. Objectives Maximize sales volume-both long and short-term Target hospitals with the most post-operative recovery beds and room so Breakeven sales volume Sufficient cash flow Gain brand loyalty and recognition Considerations for pricing strategy o Expected demand for the system List prices of competition Customers perceived value for features, advantages, and benefits of Bair Hugger. o Buyer price sensitivity o Production cost per unit (Heater/Blower unit cost and blanket cost) o Margin paid to distributors Decision Alternatives 1. Use a price skimming strategy that involves charging a relatively high price when a new, innovative product is introduced to the market. o Set prices above the market price upon entering the market to increase perceived value, and short run gains. Money earned from short run gains will be used to increase the contribution per unit.
2. Use a penetration pricing strategy that involves setting the price low rather than high to establish a dominant market share. This strategy will compliment the price-sensitivity of the market because it will attract new buyers who have shown resistance or uncertainty due to the price. o Set prices below the average price of competitors to attract new customer so Target prospects at larger hospitals to increase sales volume Pros: Decision Alternative 1 o Price skimming will allow Augustine Medical to earn a return on their investments such as start up costs, advertising, promotions, research and development High prices will help build the image of the product and company o Initial high prices will allow the company to reduce their prices and offer “discounts” when competition arrives. Cons: o Many hospitals tend to conduct extensive reviews of products that are priced over $1500. This will lengthen the purchase decision process for prospective buyers.
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Pros: Decision Alternative 2 o Company will benefit from economies of scale This strategy will discourage competition because a new product will be introduced to the market at a cheaper price. o Ease entry to the market More attractive to buyer’s b / c it makes purchase decisions easier. Cons: o The perceived quality of the product will be lower Insufficient production and distribution capabilities to meet demand Threat of competition reducing their prices, nullifying the company’s potential competitive advantage. Recommendations After conducting a thorough analysis of the decision alternatives, Augustine Medical, Inc. should choose the second decision alternative.
A penetration pricing strategy will lead to large sales volumes and market share and eventually lower the cost per unit. This is important for Augustine Medical, Inc. because they are introducing a new product to the market and based on the company’s research price sensitivity is a major concern of most prospective buyers. Pricing the Bair Hugger below the market price will make the product more attractive to buyers and will also increase the trial usage of the product. Buyers may be resistant to testing the product if they have no intention in purchasing the product. Augustine Medical, Inc.
through research discovered that hospitals with fewer than seven beds would not be highly receptive to the Bair Hugger Patient Warming System, forcing the company to only target larger hospitals with more beds. Using a penetration strategy will give Augustine Medical the ability to target both large and small hospitals because of the affordability of their product offering. Currently direct competitors such as Climator are a major threat because of the similarities of their products to the Bair Hugger. Pricing our product below their price of $4000 will make our product more attractive upon entering the market.
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Another recommendation would be to sell the heater / blower unit separately and the blanket to be sold as a complimentary product. The penetration pricing strategy will attract sales selling these products separately because the main product (heater / blower unit) will be sold at a discount and the complimentary product will be marked up. The blanket can only be used with the heater / blower unit so buyers will be forced to purchase the blanket at a marked up price. Implementation Augustine Medical, Inc. should decide on the price of their product then make all the information available to hospitals and distributor organizations.
The company should then attend as many medical trade shows as possible to increase the visibility of their product by providing demonstrations to prospective buyers. To obtain first mover advantage it is important that Augustine Medical, Inc. puts together a sales force to prospect and qualify potential buyers. The sales force should proceed by using direct selling tactics as well as guerilla marketing tactics to effectively penetrate the market. Because the Bair Hugger will be priced lower than our direct competitor’s products it is important that Augustine Medical, Inc.
stays focused on it objective to increase sales volume and capture large portion of the market share in the early stages. Building a portfolio of current buyers, and potential buyers will secure the company’s profitability in the long run because of brand loyalty and brand recognition. The implementation process should be completed within a 3-4 month period.