Marketing Research For Augusti Essay

This essay has a total of 2539 words and 11 pages.

Marketing Research For Augusti


Executive summary
By early 1988, Augustine Medical executives were actively engaged in finalizing and
marketing the program for the patient warming system named Bair Hugger Patient Warming
System. The principal question yet to be resolved was how to price this system. Several
considerations are required in terms of organizational objectives, demand for the product,
customer value perception, buyer price sensitivity, the price of competitive offering, and
direct variable costs. The company has two alternatives to price this system, either the
skimming pricing strategy or the penetration pricing strategy.

The Bair Hugger system, which consist of a heater/blower unit and a separate inflatable
plastic/paper blanket, is an air-circulation product and provides hypothermia patients
surface warming. Although using the skimming pricing strategy has greater return in the
short run, the danger is the company can not have a greater market share as well as a long
run profit. Also, this market is price-sensitive to alternative methods. On the other
hand, since the demand is known, the estimate of the total potential market for this
system is about 2737 units, and 1000 units of blankets for each blower unit per year, and
there are many substitutes existing, we strongly recommend that the company should employ
penetration pricing strategy to market this system. In conclusion, the company can get
into the market quickly and gain favorable market shares as soon as possible if it offers
a low-priced blower unit. Also, the company could have long-term profits by selling lots
of blankets only if they have greater market shares.



Problem Definition
In July 1987, Augustine Medical was incorporated as a Minnesota corporation to develop and
market products for hospital operating rooms and postoperative recovery rooms. One of two
products the company planned to produce and sell was the Bair Hugger Patient Warming
System designed to treat postoperative hypothermia in the recovery room. Postoperative
hypothermia (a condition defined as a body temperature of less than 36 degrees Centigrade
or 96 degrees Fahrenheit) occurs in 60-80 percent of all postoperative patients.

Many competing technologies are available for the prevention and treatment of hypothermia.
These technologies generally fall into one of two broad types of patient warming: surface
warming or internal warming. The Bair Hugger system, which consist of a heater/blower unit
and a separate inflatable plastic/paper blanket, is an air-circulation product and
provides hypothermia patients surface warming. The warming time per patient is about two
hours. The plastic cover was patented in 1986; there is no patent protection for the
heater/blower unit.

The central issue at this time was the determination of the list price to hospitals for
the heater/blower unit and the plastic blanket. The price set for the Bair Hugger Patient
Warming System would influence the rate at which prospective buyers would purchase the
system since the market was price-sensitive to alternative methods. Also, price and volume
together would influence the cash flow position of the company. Before the company prices
this system, several considerations are required in terms of organizational objectives,
demand for the product, customer value perception and buyer price sensitivity, the price
of competitive offering, and direct variable costs.

The estimate of total potential market for heater/blower unit is 2737 units and 2737000
units for blankets (see exhibit 1). The direct cost of the heater/blower unit would be
$380 and $0.85 per blanket. The initial investment, $500,000, for this system would cover
the fixed cost of the company during first year of operation. Based on this basic
information and other considerations, the company has to determine its pricing strategy
for both products. There are two alternatives for this company.


Statement of Alternatives
Alternative A: Skimming pricing strategy.
Alternative B: Penetration pricing strategy.

Analysis of Alternative
Alternative A: The company could employ skimming pricing strategy and price heater/blower
unit and blanket by $4000 and $20 respectively.

Many competing technologies are available for the prevention and treatment of hypothermia.
These technologies generally fall into one of two broad types of patient warming: surface
warming or internal warming. A variety of competitive products includes warmed hospital
blankets, water-circulating blankets, reflective thermal drapes, and air-circulating
blankets and mattresses. Their comparison in terms of product value and annual cost show
in exhibit 1.

There are three reasons to support the company to employ the skimming pricing strategy.
First, the Bair Hugger system, an air-circulating product, consists of a heater/blower
unit and a separate inflatable plastic blanket. The plastic cover was patented in 1986,
which is the chief competitive advantage to prevent The Bair Hugger system from losing to
competition. Even though there is no patent protection for the heater/blower unit, the
heater/blower unit can not work without the blanket. In the other words, they are
complementary products.

Second, there is a realistic perceived value in this system by comparing with other
competitive products (see exhibit 2). The advantages of warmed-air technology are that it
is safe, lightweight, and theoretically more effective than warmed hospital blankets or
water-circulating blankets. Also, based on interviews with physicians and nurses,
respondents felt that the Bair Hugger Patient Warming System would speed recovery for
postoperative patients. Since this technology is not in common use in the Unite States and
no product is available in the current market, the target markets are not familiar with
these kind of products. Therefore, the company can position and price this system as a
premium quality product.

Third, skimming pricing strategy can help the company to generate funds quickly to recover
its investment or finance other development efforts. From exhibit 1, we know the total
potential market demand for the heater/blower unit is 2737 units. Since the heater/blower
unit is a durable product and the total demand for heater/blower units is known, the
future development of this market has been constrained. Under this situation, the company
may plan an early withdrawal from the market by employing the skimming price strategy.
This involves setting a high price and engaging in only limited introductory advertising
and promotion to maximize per unit profits and recover the product¡¦s development costs
as soon as possible. At the same time, the company also works to develop new applications
for its technology or the next generation of more advanced technology. Then when
competitors enter the market and margins fall, the company is ready to move into new
segments of the market.

In the short run, skimming pricing strategy could help the company gain funds quickly, but
high price may also cause the company to get out of the market quickly. In this case,
since the demand is known and substitutes are numerous, the company may fail to gain
favorable market shares because of high price for both products. If Augustine Medical
adopts the skimming pricing strategy, the company only needs to sell 37 units to reach the
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