Augustine Medical, Inc. Case Analysis

Augustine Medical, Inc. Case Analysis

Augustine Medical

Augustine Medical is a Minnesota-based company specialized in producing medical appliances. It was founded by a former surgeon who had the ambition of improving the treatment of hypothermia. The organization is currently engaged in promoting their latest product - the Bair Hugger Patient Warming System. The device is to be used in the postoperative rooms and its aim is to treat the patients' hypothermia. It consists of two parts - a blowing unit (blower or heater) and a plastic / paper cover (or blanket).

The problem Augustine Medical is currently facing relates to the price to be implemented in the sales of their latest product. The managerial team has yet failed to respond to this question. The importance of setting the proper retail price for the Bair Hugger Patient Warming System is given by the following three reasons: "First, it was felt that the price set for the Bair Hugger Patient Warming System would influence the rate at which prospective buyers would purchase the system. Second, price and volume together would influence the cash-flow position of the company. Third, the company would soon have to prepare price-literature for its distributor organizations and for a scheduled medical trade show, where the system would be shown for the first time" (Case, p.10).

3. Situation Analysis

Internal Strengths the product addresses a wide need and it is easy and practical to use the product is composed of two complementary parts and it is easy to transport the blanket is patented

Augustine Medical is a strong company with expertise in this field

Internal Weaknesses the product is large and may prove less efficient to use than other alternatives there is no patent for the blower the product is highly price sensitive

External Opportunities there would seem to an exist a large application for the product as 60 to 80% of the post-op patents suffer from hypothermia the alternatives to increasing the body temperature of post-op patients are at times inefficient some of the disadvantages of alternative solutions to treating hypothermia (and competing products of Bair Hugger) include high costs, the fact that they require the patient's temperature to function or that they only produce short-term effects competing products are generally similar, creating a fruitful opportunity for Augustine Medical to differentiate its products through the implementation of the proper marketing strategies

External Threats there exist less costly alternatives; the warmed hospital blankets are inexpensive, safe and simple to use wide variety of competing products, which reveal various advantages competitors integrate the latest technologies and strive to reduce retail prices and increase the life of products the principles of the free market allow foreign manufacturers to penetrate the U.S. market and compete against Augustine Medical

4. Identification of Alternatives

There are three possible pricing alternatives for Augustine Medical's Bair Hugger Patient Warming System. They revolve around the following prices:

1) $995 for the blower and $12 for the blanket

2) $1,499 for the blower and $20 for the blanket

3) $3,995 for the blower and $22 for the blanket

1) $995 for the blower and $12 for the blanket

This is a penetration pricing strategy as it implements a lower price than the competition.

First year contribution

Heater/Blower Contribution (1,401,955) +

Blanket Contribution (x1000) (16,908)=

System Contribution

Price (discounted) - Direct Costs

729,396.5-535,420

11,835.6-1,197.6

Breakeven in systems (units)

B/E Units (year one) = 799 units

Fixed Cost ($500,000) / System Contribution = 2.44

2) $1,499 for the blower and $20 for the blanket

This is a variable pricing strategy as it considers the costs incurred in the production and distribution of the Bair Hugger Patient Warming System

First year contribution

Heater/Blower Contribution (2,112,091) +

Blanket Contribution (x1000) (28,180)=

System Contribution

Price (discounted) - Direct Costs

1,478,463.7-535,420

Breakeven in systems (units)

B/E Units (year one) = 439 units

Fixed Cost ($500,000) / System Contribution = 0.52

3) $3,995 for the blower and $22 for the blanket

This a skimming pricing strategy as it implements a significantly higher price than the competition.

First year contribution

Heater/Blower Contribution (5,628,955) +

Blanket Contribution (x1000) (28,180)=

System Contribution

Price (discounted) - Direct Costs

3,940,268.5-535,420

Breakeven in systems (units)

B/E Units (year one) = 138 units

Fixed Cost ($500,000) / System Contribution = 0.14

5. Recommended Strategy

The first strategy aims to attract as many customers as possible by providing the product at a lower price than the competition. The third strategy is just the opposite of the first one in the meaning that it implements high retail price, with the aim of ensuring quick revenues. Aside these obvious benefits, each of the two alternatives presents limitations. The penetration pricing strategy stands the risks of generating large amounts of sales at an unsustainable retail price. On the other hand, the skimming pricing strategy may throw off the potential buyers through the high retail price.

A specification that must hereby be made is that both skimming and penetration pricing strategies are used in the incipient stages of market entering. They are both designed to serve specific purposes, but in the long run, they are not viable and must be replaced with a more stable pricing strategy. This is generally the variable pricing strategy, in which the retail price is set based on the costs incurred in the manufacturing and distribution of the respective item. This is the most stable approach to setting the price mostly since changes only occur when the costs incurred become modified. Therefore, Augustine Medical should implement the second alternative, with the retail price of the blower of $1,499 and a unit price of $20 per blanket.