I. Major Issue/Problem
The major issue/problem: How should Augustine Medical, Inc. price their new product the Bair Hugger Patient Warming System? II. Alternative Courses of Action
A. Augustine Medical, Inc. should price Bair Hugger Patient Warming System at $4,250.00 and the disposable blankets at $24.00.
a. It will attract buyers with its lower price over the other systems and its feature which offer several advantages over the current more expensive ineffective systems.
b. Because it will be slightly higher priced than the Climator system its most close competitor, it will create the perception of a higher quality system than the Climator while remaining lower in price than the other systems.
c. Because it is priced lower than the other systems it could create the perception among buyers it is lower quality than the other systems.
d. Buyers could choose to go with the Climator system because it is cheaper and comparable to the Bair Hugger Patient Warming System.
B. Augustine Medical, Inc. should price Bair Hugger Patient Warming System at $1,500 and the blankets at $5.00 each.
a. It will attract buyers because the hospitals will avoid having to go through formal review and decision process when purchasing.
e. It will be the cheapest system on the market and will attract buyers with its lower price and features which offer several advantages over the current more expensive systems.
b. By pricing the system at such a low price it might deter buyers from purchasing by creating the perception of a low quality product since it is a new product offered at such a low price.
c. Because of the low quality perception of the Bair Hugger Patient Warming System, Climator as the closest comparable product will gain the market.
III. Recommended Course of Action
I recommend Augustine Medical Inc. price the Bair Hugger Patient Warming System at $4250.00 and the blankets at $24.00.
1. If we price the system at $4,250.00 per unit, with a 30% margin paid to the distributor (less discounts) Augustine Medical Inc. would be left with a “selling price” of $2,975.00 per unit. The cost per unit is $380.00. The contribution margin for each unit would be $2,595.00. The blanket price set at $24.00 with a 40% margin paid to the distributor (less discounts) the “selling price” would be $14.40. With a cost per unit of $.85 the contribution margin per unit would be $13.55. If we price the system at $1500.00 per unit, with the 30% margin to the distributor the selling price would be $1,050.00 and the contribution margin would be $670.00. With the blanket price set at $5.00 and the 40% margin paid to the distributor the “selling price” would be $3.00 and the contribution margin would be $2.15.
2. The total fixed cost of $500,000.00 with a contribution margin of $2,595.00 means we need 193 units to break even. There are approximately 26,146 postoperative recovery beds minus the hospitals with fewer than seven beds. With the projection that one system would be sold for every eight postoperative recovery room beds the prospective market for the system is 3,269 units. Augustine Medical needs to capture less than 5% of the prospective market to breakeven. With a $670.00 contribution margin the break even number of units would be 747 units, at this price Augustine Medical would need to capture 23% of the market to breakeven.
3. There are 21,000,000 surgical operations per year of those 60% to 80% of the patients become hypothermic. Using an average of 70% there are approximately 14,700,000 patients in need of the Bair Hugger Patient Warming System. The total cost for the Bair Hugger Patient Warming System with a price of $4250.00 and blankets priced at $24.00 would be $14,237,220.00 ($500,000.00 + $1,242,220.00 + $12,495,000.00. Total revenue $221,405,275.00 ($9,725,275.00 + $211,680,000.00). The profit for Augustine Medical Inc. would be $207,168,055.00. If the system is priced at $1500.00 and the blankets at $5.00, the total revenue would be $76,932,450.00 with the total cost of $14,237,220.00 the profit would be $62,695,239.