Business Studies Augustine Medical Inc.; the Bair

Business Studies

Augustine Medical Inc.; the Bair Hugger Case Study

Augustine Medical Inc., have developed the Bair Hugger patient warming system. Designed to be used in post operative situations prevent or treat post-operative hyperthermia, the product offers a number of advantages over the existing systems. However, introducing a new product into the medical markets can be a challenge, as there are constraints which may hinder market entry and the gaining of market share.

There are already a number of products on the market which are designed to perform the same task, preventing or treating post-operative hypothermia. Many of these are tried and tested, and trusted by the hospitals. Some of the cheaper options include use of blankets which are warmed by the staff to be placed on the patient, water circulating blankets, thermal drapes and the use of infrared heating lamps. As these are established they may be seen as providing competition. In order for the Bair Hugger to be purchased a hospitals must see the potential benefit over their existing approaches. This is a problem faced by all new products on the market where there is existing competition satisfying the same need, even if it is in a different way.

In the hospital market there are the additional barriers, there is a conservative approach to the purchase of new equipment, as the case states, no one wants to buy a "pig in a poke." Cost controls and financial management is also a significant influence on the purchase of new equipment, with any items over $1,500 often requiring a formal review decision making process. Furthermore, one of the most common existing assessment strategies has a very low perceived cost, the laundering of blankets is at $.13 per pound, is absorbed into the hospital overhead rather than being itemized as a separate cost. These are all issues which may constrain the sale of the Bair Hugger. The research with the doctors and nurses may have indicated that the process of the Bair Hugger may have advantages over the existing processes, but there is a significant reluctance to make investments in new technology.

Furthermore, there is a constraint market. Rather than appealing to all hospitals that have post-operative debt, it has been assessed that out of the 7,098 hospitals in the country, the market only consists of 1,888; these are the hospitals where there are 7 or more post-operative beds.

Question 2

An important decision is the way in which product will be price. It is essential that it is priced in a manner that will make it attractive to hospitals, at the same time ensure that sufficient profit may be realized, after the fixed and variable costs have been covered. Examining the marketplace will help to guide two different pricing point. Each of these may be assessed before pricing decisions made. For each pricing strategy, price of the heater/blower unit and the price of the blankets may be considered.

The first pricing point is designed to make the product attractive, pricing the heater/blower unit at $1,400. The closest competitor for the Bair Hugger is another product which is not yet on the market; this is called The Climator, which could be brought onto the market at price of $4,000. The price of $1,400 may be seen as a very aggressive pricing strategy to undercut the potential of this product, to a degree that the company may decide is post-operative model may not be worth distributing in United States. Furthermore, the price of $1,400 is pitched at a level that may help ensure sales are made without the need for the formal review in decision-making processes that are associated with purchases in $1,500 or over.

With the purchase of the units there will also need to be the purchase of blankets. In order to make the purchase attractive, the blankets may be priced at $3 each. This is designed to make them competitive with the existing customer laundering blankets. It has been noted in the case study that an average of 6 to 8 preheated blankets, each weighing two pounds, will be used per application, with roughly 50% of patients requiring a second application. If 8 blankets weighing 16 pounds are used, and laundry costs are $.13 per pound, laundry costs for each set of blankets is $2.08. If 50% of patients require a second application, this will give a mean cost per patient of $3.12. Therefore, at $3 the disposable blankets are directly competitive with the use of the traditional warming blankets, at the same time as providing for increased efficiency in the way he did maintained as well as reducing the labor required from the ward staff in heating and applying the blankets. This is a pricing option that creates a highly competitive offering suitable for a price sensitive market. This is option 1.

The second pricing point was considered by looking at the market, and existing views expressed by medical staff regarding the Bair Hugger. While there was reluctance to making the capital purchase of the heater/blower unit, there was an expression of interest in using the heater/blower free of charge while purchasing the disposable blankets. Therefore, this pricing point has no charge for the provision of the heater/blower unit, but charges more for the blankets. The pricing point of these blankets has been put at $6; this puts the product in a category that can compete directly with the use of thermal drapes and complimentary items, such as hats and leggings.

To determine the potential for both of these pricing points the cost has been broken down to allow for the markups of the dealers, to assess the contribution per unit. It is assumed that for each unit in operation in a hospital, the demand will be for 1,120 blankets per annum. This allows for an average of one blanket for every two post-operative beds per working day in that hospital, as each heater/blower unit will support 8 beds. It is highly likely that in hospitals where this technology is utilized, the demand blankets may be higher, but this approach has been adopted to ensure that there is a conservative approach. The two pricing options are shown below in table 1.

Option A

Option B

Price of heater blower

1,400

0

Manufactures price (before dealer 30% mark up)

0

Direct cost of blower

Contribution per heater/blower

-380

Hospital price for blanket

3

6

Manufacturers price (before dealer 40% mark up)

1.8

3.6

Variable cost of blanket

0.85

0.85

Contribution per single blanket

0.95

2.75

Total contrition for blankets per unit assumed to be 1120

1,064

3,080

Total contrition per unit sold for the first year

1,664

2,700

Overheads

50,000

50,000

Break even point

31

19

From this it can be seen at, as long as sufficient blankets are purchased, the auction be pricing strategy, where the heater/blower unit is provided free of charge, there is an expected higher level of contribution per unit in the first year, were only 19 units will need to be sold in order to break even.