What price and Why? Essay Sample
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What price and Why? Essay Sample
To assess what price Oxyglobin should be set at, we must analyze the 4 C’s. Firstly, in evaluating the company, we determine that the cost of production is $15 Million per year independent of volume, plus $1.50 per unit variable cost. The current capacity for Oxyglobin is 300,000 units. In exhibits 4 and 5 we determine their break-even cost.
Next, we must determine who the customer is and what their potential is. To do this, we begin by looking at the number of veterinary practices in the US. Exhibit 1 shows the average monthly case load of the 15,000 US veterinary practices. In looking at these averages, we can determine the absolute number of practices and doctors for each class of practice. Taking the average number of animals (dogs, cats, and other) each class of practice treats each month and multiplying that by the absolute number of practices in each class yields the absolute number of animals each practice treats per month and subsequently the annual potential. Targeting veterinarians in the emergency care segment is the most efficient and effective approach. The potential of this segment is 6,930,000 animals per year. Of this nearly 7 Million animals in need of blood, approximately 7 % of the need blood come from blood banks and the remaining 93% from a very inefficient and costly “donor animal”. This 93% (6,444,900) represent the potential market for Oxyglobin and is clearly far above the 300,000 unit annual capacity for Oxyglobin.
Conservatively, if we assume 30% of these animals are in critical need of blood then we get 2,079,000 animals. Of this population, we know that 60% of Veterinarians and 65% of pet owners are willing to pay the $200, $400 (vets cost doubled to pet owner) price. Again, being conservative, if only 25% are actually willing to pay those prices, we still have a demand of 519,750, again far exceeding our capacity. Exhibits 2 and 3 represent the willingness of vets and owners to pay Oxyglobin at various price points. From this we can derive our estimated total revenue assuming both unlimited production capacity and assuming our 300,000 capacity. We can see that at unlimited capacity, our total revenue for our target (emergency care) is maximized between $150 and $200, and at 300,000 capacity our total revenue is maximized at $200, therefore we select $200. At this price point and capacity we would generate $60,000,000 in revenue (300,000 units * $200). Exhibit 6 calculates the profit at this price.
The competition in the animal blood substitute market is essentially non-existent in there is no other company in this space. The only other viable option to Oxyglobin was to use an administratively complex donor animal or a supply strapped animal blood bank.
Lastly, the collaboration or distribution of Oxyglobin is critical to its success and a major factor in its pricing. To distribute Oxyglobin through a regional or national network would require a commission to the distributor of 20% to 30% of the selling price. At $200 and 300,000 units, this would be between $9,000,000 and $13,500,000. It is more cost effective for Biopure to sell directly to the veterinary practices. This manufacturer direct model (Exhibit 4) will require Biopure to recruit and maintain a sales force of approximately 10 employees (at an estimate total cost of $100,000 per) and carries a $10-$15 distribution cost per unit. With 750 emergency practices, each sales person would be assigned 75 practices. At 300,000 units the distribution cost is $4,500,000 on the high end and our staff costs and administration costs an additional $1,000,000. Therefore, our $5,500,000 cost is more favorable to the $9-13.5 Million for an independent distributor and is built into our $200 price.