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 products 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 break-even point and sell 48 units to gain 30% ROI (see exhibit 4) in first year. Let us assume that the sales volume is held constant, 48 units in the second year, the company can have $2,112,000 revenue, in which blanket sales contribute $1,920,000. Also, from the table contribution by combination of blower prices and blanket prices, the price of a blanket is more sensitive than the price of a heater/blower unit because a blanket is a disposable product and sales of each heater/blower unit will create 1000 units of blankets per year. If the blower price is held constant, per dollar change in blanket price will have a $600 difference in contribution margin. In other words, the blower price can influence the rate at which prospective buyers would purchase the system since the market was price-sensitive to alternative methods, whereas the blanket price dominates margins because of its volume. Therefore, in the long run, a company can maximize its profits by selling lots of blankets, which requires selling large volume of blower units in the early marketing stage. Besides, there is no patent protection for the blower unit. The competitor can enter this market easily by offering lowpriced products as well as blanket market since they are complementary. In short, it is risky to employ skimming pricing strategy for this company in the current market.

II Alternative B: The company could employ penetration-pricing strategy and price the heater/blower unit and blanket by $380 and $16 respectively. A penetration strategy is one in which the seller charges a relatively low price on a new product. Generally, this policy is appropriate for the Bair Hugger Patient Warming System because of the following conditions.

1. Demand for the product is price elastic. The more substitutes a product has, the greater its price elasticity. Obviously, it is valid in this market because there is a variety of competitive products existing. Also, through an interview with physicians and nurses, respondents felt that the product was pricesensitive. Moreover, in the hospital, expenditures for equipment over $1500 were typically subject to a formal review and decision process. 2. Competitors are expected move in rapidly. The Hosworth-Climator is an English-made product that provides a controlled temperature microclimate by means of airflow from a mattress. The Climator comes in a variety of models for use in recovery rooms. This product could be distributed in the United States sometime in 1988. 3. The offering is not unique or protected by patents. Since many competing technologies are available for the prevention and treatment of hypothermia and there is no patent protection for the heater/blower unit, we price blower unit by its various cost in order to protect this system from lowpriced or patented products. 4. A low price and profit margin may also discourage competition. The product of Bair Hugger Patient Warming System has a very flexible room on its price range. The selling price of the heater/blower could be from $380 to $5,295 per unit and the blanket is from $0.85 to $26 at each. The company can price their new product on low price in order to make the profit larger. 5. Bair Huggers major objective is to gain a large market share. The objective of pricing the warming system is to focus on buying market shares quickly, offering more benefits to customer, and accomplishing the objective of return on investment.

In short, Augustine could dominate this market by offering a low-priced blower unit; also, it will be easier for the company to achieve adequate rate of return and profit maximization in the long run. We consider the major profit should come from the disposable blanket because the blower unit is a durable product but the blanket is a disposable product. More the heater/blower sold the more blanket volume will sold because per machine consumes 1,000 units of blanket per year. In the other words, there will be no disposable blanket market if the company does not sell heater/blower. From Exhibit 2, we can evaluate that the potential markets for heater/blower were only 2,737 units per year which is limited. So, the company must apply low price strategy to seize the market quickly. Since the blanket has patented protection, we charge this product with higher price. Therefore, there is only $4 different between alternative A and B. Also, once the company can successful gain the market share by low-priced blower units, they can also have greater market position in the blanket market. Physicians and nurses were very receptive to the notion of using the blower unit free of charge and only paying for the disposable blankets. Thus, the Bair Hugger System will be the lowest product if the hospitals do not need to pay for blankets.

The heater/blower will be sold same as its variable cost at $380 per unit, and the disposable blanket will be sold at $16 each for retail price. The company needs only gain 2.76% (76 machines/ 2,746 total machine) market share by selling 76 units of heater/blower and 75,267 blankets to achieve 30 percent ROI in 1988 (Exhibit 5). The volume at the break-even point is around 57,900 blankets and 58 heaters/blowers. Let us also assume the same sales volume, 76 units in the second year, the company can have 2,460,880 revenue, which is greater than alternative A although we charge the blower unit by its variable cost. From this situation, we know the profit can be most easily earned from disposable blanket. Therefore, the Augustine Medical, Inc. still has good opportunity to gain profit if it can sell more heaters/blowers in order to increase its volume of disposable blanket.

Planning and Development For the purpose of this case, the most important pricing objectives are pricing to achieve a target return on investment, pricing to achieve a target market share, and pricing to prevent competition. Augustine Medical Inc. should apply the penetration-pricing strategy to increase heaters/blowers market share. 1. Keeping the market share in the heater/blower market is an important factor because the hospitals have to purchase its patented blankets once hospitals accept the companys heaters/blowers. 2. Even if Augustine Medical Inc. is selling the heaters/blowers under its variable cost, it is possible for the company to gain enough profit from selling blankets. If the market is very competitive, it is necessary to promote free charge for heaters/blowers. 3. Promotion is another important factor for the companys development in the future. Customers want to test the warming system before they purchase it. The company should satisfy the consumers needs in a way to show them the operation of the system, and explain the benefits they will receive from the product. The company may provide guarantees such as maintaining the system frequently. 4. After the company dominates the market, it is possible to increase the blankets price for only $.50 or $1 per unit that will increase lots of profits. 5. Do more research and develop on the different products for different kinds of patients.

Conclusion In this case, it is more complex to price a product line, which consists of two products. Basically, they are complementary products, and their price should go together. But based on our analysis, we decided to price the blower unit at a low price, whereas the blanket has a high price. The reason is not only does the blanket have patented protection but also the blanket can continue to create profits. Also, the price of the blower unit will influence the market share because this is a price-sensitive market. Indeed, pricing decisions determine the type of customers and competitors an organization will attract.

We are wondering why this market did not become dominated by technology, whereas the warmed hospital blankets are the most commonly used because of low cost. If this market prefers technological products, the skimming pricing strategy may have more advantages for this company. Unfortunately, the factor of price sensitivity still dominates our price decision. In conclusion, when a company introduces a new product into the price-sensitive market, the competitors are expected to move in the market quickly. It is better for the company to apply penetration-pricing strategy, in order to obtain a large market share in a short period and also discourage competitors who plan on entering the market. Next Paper Augustine Medical, Inc. : The Bair Hugger Patient Warming System 1987 AugustineMedical,Inc Minnesota

Hugger

1988 Patient Warming System

Bair The Bair

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SurfaceWarmingTechnologies Internal-Warming Technologies

(Water-circulating blankets) 1

(Warmed hospital blankets) (Air-circulating blankets and

mattresses) lamps) temperature)

(Thermal drapers)  (Infrared heating (Partial warm-water immersion) (Increasing room Warmed hospital blankets

50% blankets Water-circulating blankets 15% Water-circulating blankets 85%~90% Electric blankets Air-circulating blankets and mattresses drapers blankets covers) 60%   Inc reasing room temperature Partial warm-water immersion Infrared heating lamps (head (blankets)  (leggings) (Warmed reflective hospital blankets Water-circulating blankets) Thermal Water-circulating

70 (Inspiring heated and humidified air) (Warmed intravenous(I.V.) fluids) (Drug therapy) Inspiring heated and humidified air

Warmed intravenous(I.V.) fluids Drug therapy

Warmed Hospital Blankets CirculatingBlankets Mattresses Blankets) Reflective Thermal Drapes Bair Hugger Air-Circulating Blankets and (Warmed Hospital

Water-

$0.13 (Water-circulating

blankets) Gaymar Industries Pharmaseal

Cincinnati Sub-Zero, $4,895~$5,295

$3,000/ ( ) $20~26/

$165~375/

(Reflective thermal drapers) O.R. Concepts Thermadrape 3 (adult head cover)

$0.49 drapes) mattresses) The Sweetland Bed Warmer Dryer / Climator $2.50~$3.98( ) Air-circulating blankets and

(adult (leggings) $1.50 Cast (

Hosworthclimator

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1988

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$4,895/ $24/

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( 90

American Hospital

1988

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Gaymar Industries

150

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31,300

Climator

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12-17 391 20 18-22 135 10 23-28 47 6 29-33 17 2 >33 17 2 Bair Hugger

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(Bair Hugger Patient 4.

5. 6. Inc. 1987 Dr. Scott Augustine Bair Hugger Patient Warming System (Water-circulating Bair Hugger Patient Warming 1,500 Augustine Medical Inc. Augustine Medical

System blankets)

Augustine Augustine Medical $500,000 ( / )

(warming covers) System Bair Hugger Patient Warming

( ) 40% $380 / Discussion Questions: 1. How would you characterize the prevailing technologies and products for preventing and treating postoperative hypothermia? 2. What factors will influence the market potential for the Bair Hugger Patient Warning System ( BHPWS) ? Develop an estimate of the market potential. 3. What should be the pricing objectives and strategies for The Bair Hugger Patient Warming System 4. What list price to hospitals should Augustine Medical set for The Bair Hugger Patient Warming System and what short-run profit impact can be expected from this decision 5. What is the likely long-run profit impact of your pricing decision $0.85 / 30% /

Next Paper Overview Augustine Medical, Inc. was founded by Dr. Scott Augustine, an anesthesiologist from Minnesota, in 1987. The company was created to develop and market products for hospital operating rooms and postoperative recovery rooms. The company provides innovative solutions to fight against conditions like hypothermia. Medical research indicates that 60 to 80 percent of all postoperative recovery room patients are hypothermic. Hypothermia is caused by a patient's exposure to cold temperatures or can also be caused by heat loss due to evaporation of the fluids. Dr. Augustine's personal experience in the operating room convinced him that there was a need for a new system. Dr. Augustine also realized that the potential market is huge for this new product. The numbers indicate that approximately 21 million surgical operations are performed annually in the United States, and that approximately 5,500 hospitals have operating rooms. The Bair Hugger Patient Warming System consists of a heat source and a separate disposable warming cover that directs a gentle flow of warm air across the body. The Bair Hugger heat source uses a reliable high efficiency blower, a sealed 400W heating element, and a microprocessor based temperature control to create a continuous flow of warm air. The heat source complies with all safety requirements

for hospital equipment. Augustine Medical, Inc. was able to find investors that contributed to the initial capitalization of $500,000. These initial funds that were collected were used for staff support, facilities, and marketing. Distribution Augustine Medical Inc. planned for The Bair Hugger Patient Warming System to be sold by and through medical distributors in regions across the country. Distributors would call hospitals, demonstrate the system, and maintain inventory of the blanket. The distributors were paid a margin of 30 percent on the heater/blower unit and 40 percent on the blankets. The estimated direct cost of each heater/blower unit was $380 and $0.85 per blanket. Problem The major issue that the company was faced with is how they should list the price to hospitals. The company's major concerns with price were the perceptions that it formed in potential consumers minds, which would in-turn negatively or positively affect the cash flow. Price is a sensitive issue for the company because the level of competition and other similar product that are offered in the medical market. There are a number of products that can be considered direct competitors, but only two of the products have direct similarities but are not sold in the United States. With this in mind, Augustine Medical Inc. has a competitive advantage in the U.S. because they have first movers advantage. This could give them flexibility when choosing their pricing strategy. The average price range of competitive products is $3000 to $5000. SWOT Analysis To understand Augustine Medical Inc.'s strategy, the market must explore the resources of its strengths and weaknesses. As well as capture and predict its possible market opportunities and its defenses against external threats. Strength is something a firm does well or an attribute that enhances the company's competitiveness. Weaknesses are something the firm lacks, does poorly, or a condition placing the company at a disadvantage. Opportunities consist in its potential ability for profitable long term growth. Threats identify external possibilities that may come as a hindrance to the success of the company. Exhibit one presents a detailed SWOT analysis of Augustine Medical Inc. Decisions Marketers traditionally have employed three pricing strategies: skim, penetration, and neutral. Skim pricing is the process of pricing a product high relative to competitors and the product's value. Neutral pricing is an attempt to eliminate price as a decision factor for customers by pricing neither high nor low relative to competitors. Penetration pricing is the decision to price low relative to the product's value and to the prices of similar competitors. It is a major decision to use price as the main competitive weapon in

hopes of driving the company to a position of market dominance. Since Augustine Medical Inc. is the first company entering into the market as new product developers, the neutral pricing strategy is not an option. Their first decision possibility would be to use a price skimming strategy that involves charging a relatively high price when a new, innovative product is introduced to the market. This not only set prices above the current market price, but it also increases perceived value. The second option would be penetration pricing strategy. This strategy will compliment the price-sensitivity of the market because it will attract new buyers who have shown resistance or uncertainty towards other direct competition due to the price. Recommendations After conducting a thorough analysis of the decision alternatives, Augustine Medical, Inc. should choose a penetration pricing strategy. This strategy will lead to large sales volumes and market share and eventually lower the cost per unit. The price skimming strategy will allow them to charge a relatively high price while entering the market for a period of time and then later lower the prices when the company is stable and competition begins to come in. By charging a high price initially the company can build a quality image and create some brand loyalty with it products. This is important for Augustine Medical, Inc. because they are introducing a new product to the market and based on the company's research price sensitivity is a major concern of most prospective buyers. Pricing the Bair Hugger below the market price will make the product more attractive to buyers, but buyers may be resistant to testing the product if they have no intention in purchasing the product. Using a penetration strategy will give Augustine Medical Inc. the ability to target both large and small hospitals because of the affordability of their product offering. Currently direct competitors such as Climator are a major threat because of the similarities of their products. Pricing our product below their price of $4000 will make our product more attractive upon entering the market. Another idea for Augustine Medical Inc. is to sell the blanket and that heater separately. This would allow them to bundle the two products later on as a benefit or a promotional strategy. Augustine Medical, Inc. should decide on the price of their product then make all the information available to hospitals and distributor organizations. The company should then attend medical trade shows to increase the visibility of their product. To obtain first mover advantage is important for Augustine Medical, Inc. pricing strategy. They should put together at sales force to prospect and qualify potential buyers. The sales force should proceed by using direct selling tactics in order to penetrate the market. Because the Bair Hugger will be priced lower than our direct competitor's products it is important for them to capture a large portion of the market share in the early stages. In the future years brand loyalty and brand recognition will play a major role in the success of Augustine Medical Inc.

Exhibit 1: Strengths

Simplicity of use Compatibility with existing systems Bair Hugger warms patience faster Patented plastic cover Bair Hugger has 15 year life span Heater/blower unit is subcontracted to cut cost Weaknesses

Augustine Medical is not a recognized company so there is limited brand recognition The Heater/Blower unit is not patented New to the market

Opportunities

21 million surgical operations have operating rooms and postoperative recovery rooms 5,500 hospitals with operating and postoperative rooms 60-80% of patients experience post-operative hypothermia Networking opportunities and contracts at trade shows Threats

Most hospitals already have established methods for prevention and treatment of hypothermia Substitute products: water blankets, lamps, and thermal drapes Not properly pricing and positioning their product

Next Paper Augustine Medical Inc. The Bair Hugger Patient Warming System

1. What company/organization is the subject of the problem? Augustine Medical Inc. The Bair Hugger Patient Warming System

2. What is the problem? Identify the strategic aspect of a marketing situation. Augustine Medical needs to figure out how to price the two components of the Bair Hugger Patient Warming System (the heating unit and blanket) and how to place their product against competitors.

3. What is the significance of the problem to the subject? There are many competing technologies designed to treat hypothermia of postoperative patients, most are less expensive than the Bair Hugger. Although Augustine see s their product as superior to most alternatives they need to price and introduce their product to the market before a similar air-circulating blanket is introduced to the US market (like the English-made Hosworth-Climator).

4. Who has the responsibility for addressing the problem (usually the protagonist)? Augustine Medical, Inc.

5. What does he/she need to know to do something about it? > What are the costs of producing and selling through distributors? How could they minimize distribution costs? > Augustine Medical should find out more about their competition in the long run > The company should also gain more knowledge of the hospital market and how to expand their product even further > How will price/volume influence the cash flow position of the company?

6. What are the decision options? > Use free blankets/units as a promotional offer to the hospitals > Price their product competitively compared to their competitors

7. What are some possible criteria for evaluating these options? > Hopefully in the future, after selling the product for free, the hospitals will become loyal and Augustine will have gained a huge market share and will profit. > Hope that their product is superior and that it will sell successfully at the medical trade show. Next Paper Introduction

The Bair Hugger Patient Warming System is marketed to hospitals in the United States. It is a device that has been designed specifically to treat hypothermia which many patients suffer from after operations. The Warming system is composed of two elements; there is a heater/blower unit and disposable warming covers. The ultimate problem facing Augustine Medical, Inc. is how to price theses two components of the product and how to position it compared to its competitors. There are many substitutes available for hospitals to treat and prevent hypothermia. However, there are many disadvantages to the variety of other devices which virtually treat the same condition. Augustine Medical believes that their product is superior to their competitors products.

S.W.O.T analysis of The Blair Hugger Patient Warming System

Strengths Medical research indicates that between 60 -80% of recovery room patients suffer from hypothermia. Although this is unfortunate for the patients it is a strength for the company as they have a target market. The product has been designed to allow nurses and doctors to have easy access to the disposable warming covers which are placed in the top of the blower unit. Also the unit is easy to transport as it can be moved easily as it is on wheels. Hospital staff see this product one that will make the patient feel comfortable and will speed up the patients recovery process. The product also does not burn the patient and water leaks are not an issue. As well as this the product reduces the risk of cross contamination as the blankets are disposable.

Weaknesses The warming covers needed in order to use the product will need to be restocked a lot of the time. The warming time per patient is about two hours this could pose a problem for patients because the results of the use of the device is not seen until two hours later and patients hypothermia may have gotten worse.Also this product is the only product the company have and thus demand is vital for success.

Opportunities Augustine Medical incorporated sees the opportunity to market their product to hospitals and the company believe that their product had superior advantages over competing products. If the decide to sell the unit for free to the hospitals and the hospitals would purchase the blankets they could create a monopoly.

Threats There is much competition available for hospital to use. Many cheaper alternatives exist. There are several surface warming technologies that are already on the market such as water circulating blanket and the simplest form of treatment for hypothermia is warmed hospital blankets. A main competitor that may exist in the future for the company is the Hosworth-Climator who produce a similar product in England and they could be distirbuting their product in the U.S. within the next year. However if the company price the unit and blankets too high they will be at risk of failing.

Market research:

Medical research indicates that 60 to 80% of all prospective recovery room patients are clinically hypothermic. There are several factors which contribute to postoperative hypothermia. These factors are: 1. Patients exposure to cold operating room temperatures 2. Heat loss due to evaporation of the fluids used to scrub patients 3. Evaporation from the exposed bowel 4. Breathing of dry anesthetic gases

Market size:

Research commissioned by Augustine Medical Inc. indicated that there are 31,365 postoperative recovery beds and 28,514 operating rooms in hospitals in the United States. Given the demand for the postoperative recovery room beds, the research indicates that hospitals with fewer than seven beds would not be highly receptive to the Bair Hugger Patient Warming System. The firm also projected that one system would be sold for every eight postoperative recovery room beds.

Target market:

The target market for this product is hospitals with seven or greater recovery room beds. Target market makes up 80% of all surgical operations in United States.

The Bair Hugger Patient Warming System product is not a consumer product. The main users of this product are businesses hospitals. Hospitals will always be provided with the funds necessary to prevent hypothermia and other diseases, so the demand will be common.

Interviews with physicians and nurses, followed by a demonstration of the system, returned a variety of responses. Respondents believed that the humanitarian ethic to make the patient feel more comfortable is important. Respondents also felt that the Bair Hugger Patient Warming System would speed recovery for postoperative patients. They believed that the pressure to move patients through the operating room and out of postoperative is greater than in the past. Efficiency is the byword. Capital expenditures in hospitals were subject to budget committee approval. Although the amounts varied, expenditures for equipment over $1,500 were typically subject to a formal review and decision process.

4p s:

Product:

Bair Hugger Patient Warming System is designed to control the body temperature of patients after surgery. Specifically the products is designed to treat hypothermia (a condition defined as a body temperature of less than 36 degrees Centigrade or 96 degrees Fahrenheit) experienced by patients after operations.

The Bair Hugger system consists of a heater/blower unit and a separate inflatable plastic/paper cover, or blanket. There are many advantages of this product.

Place:

The Blair Hugger Patient Warming System would be sold by and through medical products distributor organizations in various regions around the country. These distributor organisations would call on

hospitals, demonstrate the system, and maintain an inventory of blankets. The margin paid to the distributors would be competitively set at 30% of the delivered selling price on the heater/blower unit and 40% of the delivered price on the blankets.

Promotion:

Currently Augustine Medical Inc is relying on distributors to push their products. Augustine Medical Inc also is promoting their products by creating sales literature for the Bair Hugger Patient Warming System, where features and benefits of the product are detailed. Augustine Medical Inc personal experience indicated that all of these features would be welcomed by nurses and patients alike.

Price:

Heater/Blower must be under $1500 to avoid hospitals going through formal review and decision process. Only 80% of the hospitals have enough hospital rooms to have use for the Bair Hugger.

Investor interest in Augustine Medical Inc and the medical technology it provided produced an initial capital of $500,000. These funds include R&D, staff support, facilities and marketing.

It was believed that this initial investment would cover the fixed costs of the company during its first year of operation.

Variable Cost = $380 per heater and $.85 per blanket.

Margin paid to distributors would be 30% of delivered selling price of the heater/blower and 40% of the delivered price on the blankets, less discounts for both.

There are 31,365 recovery beds minus the hospital that have less than seven beds. 31,365 1,6083,603-

26,155 recovery beds in the U.S.

Unit one system will be sold for every eight recovery beds. Therefore, 26,155 divided by eight = 3,269 units to be sold The blanket come in packs of twelve and the demand for these depends on the amount of surgical procedures in hospital as well as the number of patients that could become hypothermic. The cost of the unit is $380. If the company gave the unit for free to the hospitals they would create a monopoly and only there disposible blankets would work effectivley with the units. The cost of this would be ($380 muliplied by the units to be sold 3,269 units) = $1,242,220 The 30% distributor cost is irrelevant here as the unit was not sold for a price.

Blankets There are 21million surgical operations per year in the U.S. between 60 and 80% of these become hypothermic therefore14,700,000 patients per year. divide this by the number of blankets per case i.e.12 now we potentially have sales of 1,225,000 disposible blankets. The cost of the blankets are $0.85 each multiply by 12 =$10.20 cost of case of blankets.

Plan to sell 1,225,000 cases of blankets at a cost of $10.20 = Total cost for year $12,495,000 If these case of 12 blankets were sold to hospital at $24 each the distributor cost would be 40% of that which is $9.60 per amount sold ($9.60*1,225,000=$11,760,000) Sales made would be (1,225,000 * $24.00)= $29,400,000. The hospital would virtually see it as paying as little at 2 euro per blanket.

Finally: Sales of blankets $29,400,000 Cost of units $ 1,242,220- Cost of blankets $12,495,000Distributor costs $ 11,760,000-

Total profit $ 3,902,780

Recommendations:

Augustine Medical Inc to sell their products mainly relies on distributors to demonstrate, promote and advertise their products across the country. It has limited marketing as they are only preparing literature

on the product for their distributors. Since Augustine Medical Inc is an R&D company, they should continue to develop new products.

We believe that Augustine Medical Inc is doing well promotionally, since they have targeted the right target market, which doesn t need to be segmented. The problem is that the units will not be desired at a high cost atthe minute it is evident that the units should be given to hospitals for free. This will create a buzz around the product and will be desired by all hospitals as the only cost they have is the disposible blankets which each costs them only 2 dollars $24 in total per case. It is evident that the hospital will need ot restock these disposible blankets all the time and thus Augustine Medical will earn huge profits on the blankets as it only costs $0.85 * 12 = $10.20 to produce and are sold at $ 24.00. However the companyin our opinion should be making a lerger profits but the problem is the distribution costs of 40% are extremly high and if these could be lowered it would make the company more profitable.

One must also remember that the units are sold now to hospitals and thus if Augustine medical sell them for free now as a promotional offer they will reap the profits in the following years as they will no longer have the cost of selling the units for free and will have gained a huhe market share which should help to elliminate the potential english competition in the next year. Next paper Introduction ( Background and Situation) Augustine Medical, Inc. was founded by Dr. Scott Augustine, an anesthesiologist from Minnesota, in 1987. The company was created to develop and market products for hospital operating rooms and postoperative recovery rooms. The company provides innovative solutions to combat postoperative conditions such as hypothermia. Medical research indicates that 60 to 80 percent of all postoperative recovery room patients are clinically hypothermic. Hypothermia is caused by a patient's exposure to cold operating room temperatures that are required by surgeons to control infection, and for the personal comfort of the surgeon. Hypothermia can also be a result of heat loss due to evaporation of the fluids used to scrub patients, evaporation from exposed bowel, and breathing of dry anesthetic gases. Dr. Augustine's personal experience in the operating room convinced him that there was a need for a new system to warming patients after surgery. Dr. Augustine also realized that the market for this new product would be enormous! Statistics indicate that approximately 21 million surgical operations are performed annually in the United States, and that approximately 5,500 hospitals have operating rooms and postoperative recovery rooms that include 31,365 postoperative recovery beds and 28,514 operating rooms. Upon the realization of this need and existence of the market, Dr. Augustine went on to develop The Bair Hugger Patient Warming System then he acquired a patent. The Bair Hugger Patient Warming System consists of a heat source and a separate disposable warming cover that directs a gentle flow of warm air across the body. The Bair Hugger heat source uses a reliable high efficiency blower, a sealed 400W heating element, and a microprocessor based temperature control to create a continuous

flow of warm air. The heat source complies with all safety requirements for hospital equipment. Augustine Medical, Inc. was able to find investors that contributed to the initial capitalization of $500,000. These initial funds that were collected were used for staff support, facilities, and marketing. The funds were also used to cover the fixed costs of the company while in its first year. The company subcontracted the production of the heater/blower unit and manufactured the warming covers inhouse. The company only participated in minor assembly of the product.

Augustine Medical Inc. planned for The Bair Hugger Patient Warming System to be sold by and through medical products distributors in various regions across the country. Distributors would call on hospitals, demonstrate the system, and maintain inventory of the blanket. The distributors were paid a margin of 30 percent on the heater/blower unit and 40 percent on the blankets. The estimated direct cost of each heater/blower unit was $380 and $0.85 per blanket. The major issue that the company was faced with is how they should list the price to hospitals. The company's major concerns with price was that the impact it would have on the rate at which prospective buyers would purchase the system, which would in-turn negatively or positively effect the cash flow of the company. The company was also concerned with preparing price literature for its distributors and for trade shows. Price is a very sensitive issue for the company because the level of competition and other similar product offerings that exist in the market. There are a number of products that can be considered direct competitors with The Bair Hugger, but only two of the products have direct similarities but are not sold in the United States. With this in mind, Augustine Medical Inc. has a competitive advantage in the U.S. market because they have distinct product offering. This could give them further flexibility when choosing their pricing strategy based on how well their product is positioned. The average price range of competitive products is $3000 to $5000. Augustine Medical Inc. should use a price skimming strategy upon entering the market. A price skimming strategy will allow them to charge a relatively high price while entering the market for a short period of time and later lowering the prices when the company is stable. By charging a high price initially the company can build high quality image for its products. Charging high prices will give Augustine Medical the option of lowering its prices when heavy competition arrives. This strategy would also be advantageous to the company upon its initial entry to the market because it will allow the company to regain profit margins from the funds paid to distributors and other intermediaries. This strategy will eliminate the risk of discounting and losing potential profits because the product will be marked up initially and "discounted" upon the arrival of competition and the growth stage of the products life cycle. Because prices of competitive products are priced high, using a skimming strategy will not pose a threat instead could prove to be more advantageous in the long run.

SWOT Analysis

Strengths

Simplicity of use Compatibility with existing systems Bair Hugger stops warms patience faster Patented plastic cover Bair Hugger has 15 year life span Heater/blower unit is subcontracted to cut cost Water free heating alternative to avoid leakage and burns caused by traditional products Prevents cross-contamination Patients are not required to move or adjust in anyway to use device Free Trial of product for 2 weeks

Weaknesses

Augustine Medical is not a recognized company so there is limited brand recognition The Heater/Blower unit is not patented New to the market

Opportunities

21 million surgical operations have operating rooms and postoperative recovery rooms 5,500 hospitals with operating and postoperative rooms More than 10 million patients experience discomfort and instability associated with postoperative hypothermia 60-80% of patients experience post-operative hypothermia

Anesthesiologists are dissatisfied with the current technology for treating hypothermia U.S. does not have an established warm-air technology blanket market Networking opportunities and contracts at trade shows

Threats

Climator, a foreign made product, could enter the U.S. market, capturing the first mover advantage and a large percent of market share early Most hospitals already have established methods for prevention and treatment of hypothermia such as: Surface Warming: o o o o o o Warmed hospital blankets Air-circulating blankets Thermal drapes Infrared heating lamps Partial water immersion Increasing room temperature Internal Warming o o o Heated and humidified inspired air Warmed intravenous fluids Drug therapy Hospitals have incurred costs for current methods of hypothermia treatment Substitute products: water blankets, lamps, and thermal drapes Not properly pricing and positioning their product

Issue Identification

Determining a competitive price for The Bair Hugger Warming System that will allow Augustine Medical Inc. to maintain a constant revenue flow and long term profitability as well as repeat customers. Objectives o o o o o Maximize sales volume both long and short-term Target hospitals with the most post-operative recovery beds and rooms Breakeven sales volume Sufficient cash flow Gain brand loyalty and recognition Considerations for pricing strategy o o o o o o Expected demand for the system List prices of competition Customers perceived value for features, advantages, and benefits of Bair Hugger. Buyer price sensitivity Production cost per unit (Heater/Blower unit cost and blanket cost) Margin paid to distributors

Decision Alternatives 1. Use a price skimming strategy that involves charging a relatively high price when a new, innovative product is introduced to the market. o Set prices above the market price upon entering the market to increase perceived value, and short run gains. Money earned from short run gains will be used to increase the contribution per unit.

2. Use a penetration pricing strategy that involves setting the price low rather than high to establish a dominant market share. This strategy will compliment the price-sensitivity of the market because it will attract new buyers who have shown resistance or uncertainty due to the price. o o Set prices below the average price of competitors to attract new customers Target prospects at larger hospitals to increase sales volume

Pros: Decision Alternative 1 o Price skimming will allow Augustine Medical to earn a return on their investments such as start up costs, advertising, promotions, research and development o High prices will help build the image of the product and company

o Initial high prices will allow the company to reduce their prices and offer "discounts" when competition arrives.

Cons: o Many hospitals tend to conduct extensive reviews of products that

are priced over $1500. This will lengthen the purchase decision process for prospective buyers.

Pros: Decision Alternative 2 o Company will benefit from economies of scale

o This strategy will discourage competition because a new product will be introduced to the market at a cheaper price. o o Ease entry to the market More attractive to buyer's b/c it makes purchase decisions easier.

Cons: o o The perceived quality of the product will be lower Insufficient production and distribution capabilities to meet demand

o Threat of competition reducing their prices, nullifying the company's potential competitive advantage.

Recommendations

After conducting a thorough analysis of the decision alternatives, Augustine Medical, Inc. should choose the second decision alternative. A penetration pricing strategy will lead to large sales volumes and market share and eventually lower the cost per unit. This is important for Augustine Medical, Inc. because they are introducing a new product to the market and based on the company's research price sensitivity is a major concern of most prospective buyers. Pricing the Bair Hugger below the market price will make the product more attractive to buyers and will also increase the trial usage of the product. Buyers may be resistant to testing the product if they have no intention in purchasing the product. Augustine Medical, Inc. through research discovered that hospitals with fewer than seven beds would not be highly receptive to the Bair Hugger Patient Warming System, forcing the company to only target larger hospitals with more beds. Using a penetration strategy will give Augustine Medical the ability to target both large and small hospitals because of the affordability of their product offering. Currently direct competitors such as Climator are a major threat because of the similarities of their products to the Bair Hugger. Pricing our product below their price of $4000 will make our product more attractive upon entering the market. Another recommendation would be to sell the heater/blower unit separately and the blanket to be sold as a complimentary product. The penetration pricing strategy will attract sales selling these products separately because the main product (heater/blower unit) will be sold at a discount and the complimentary product will be marked up. The blanket can only be used with the heater/blower unit so buyers will be forced to purchase the blanket at a marked up price.

Implementation

Augustine Medical, Inc. should decide on the price of their product then make all the information available to hospitals and distributor organizations. The company should then attend as many medical trade shows as possible to increase the visibility of their product by providing demonstrations to prospective buyers. To obtain first mover advantage it is important that Augustine Medical, Inc. puts together a sales force to prospect and qualify potential buyers. The sales force should proceed by using direct selling tactics as well as guerilla marketing tactics to effectively penetrate the market. Because the Bair Hugger will be priced lower than our direct competitor's products it is important that Augustine Medical, Inc. stays focused on it objective to increase sales volume and capture large portion of the market share in the early stages. Building a portfolio of current buyers, and potential buyers will secure the company's profitability in the long run because of brand loyalty and brand recognition. The implementation process should be completed within a 3-4 month period. Next paper