Dr. Scott Augustine, an anesthesiologist from Minnesota, founded Augustine Medical, Inc. in 1987 with the goal of developing and marketing products for hospital operating rooms and recovery rooms. One area of focus for the company is finding solutions for postoperative hypothermia, a condition that affects a large percentage of recovery room patients (60-80%). Hypothermia occurs due to exposure to cold temperatures in operating rooms needed for infection control and surgeon comfort, as well as heat loss from factors like fluid evaporation and breathing dry anesthetic gases.
Dr. Augustine’s own experience in the operating room made him realize the need for a new patient warming system. Recognizing the significant market potential with millions of surgeries performed annually in the U.S. and numerous hospitals equipped with operating rooms and recovery beds, he developed The Bair Hugger Patient Warming System and obtained a patent for it.
The Bair Hugger system consists of a heat source and a disposable warming cover that are essential components for its functionality. The warming cover directs warm air gently across the patient’s body while the heat source includes a high efficiency blower, sealed 400W heating element, and temperature control system operated by a microprocessor. These various components work together harmoniously to generate a continuous stream of warm air.The heat source meets safety requirements for hospital equipment. Augustine Medical, Inc. obtained investments of $500,000 to start operations, which were used for staff support, facilities, marketing, and covering fixed costs in the first year. The company subcontracted the production of the heater/blower unit but internally manufactured the warming covers. Their role in manufacturing was limited to minor assembly of the product.
Augustine Medical Inc. planned to distribute The Bair Hugger Patient Warming System through various regional medical products distributors. These distributors would demonstrate the system to hospitals and maintain an inventory of the blankets. The distributors received a 30 percent margin on the heater/blower unit and a 40 percent margin on the blankets. The company faced the challenge of determining how to price the system for hospitals. They were concerned about the impact pricing would have on the rate of system purchases, which would ultimately affect the company’s cash flow. Additionally, the company needed to prepare price literature for its distributors and trade shows. Price was a sensitive issue due to competition and similar product offerings in the market. While there were direct competitors, only two had similarities but were not sold in the US. Augustine Medical Inc. had a competitive advantage in the US market with its distinct product offering, allowing flexibility in choosing a pricing strategy based on product positioning.The average price range of competitive products is $3000 to $5000. Augustine Medical Inc. should implement a price skimming strategy when entering the market. This strategy entails setting a relatively high initial price and later reducing it once the company becomes more stable. By initially charging a high price, Augustine Medical can establish a reputation for offering high-quality products. Moreover, this will allow them the flexibility to lower prices when faced with intense competition. This approach will also benefit the company by enabling them to recover profit margins lost to distributors and intermediaries during the initial entry phase. Additionally, this strategy eliminates the risks associated with discounting and potential profit loss as the product is initially marked up and later “discounted” when competition arises and the product enters the growth stage of its life cycle. Given that competitive products are priced high, utilizing a skimming strategy will not only be non-threatening but could also prove advantageous in the long term.
Strengths – Bair Hugger is user-friendly and compatible with existing systems. It utilizes a patented plastic cover to quickly warm patients. The device has a lifespan of 15 years and reduces costs by subcontracting the heater/blower unit. It offers a water-free heating alternative, preventing leakage and burns, while also preventing cross-contamination. Patients can use the device without needing to move or adjust, and there is a free trial available for two weeks.
Weaknesses – Augustine Medical lacks brand recognition as it is not well-known in the industry. The heater/blower unit is not patented, which may pose potential challenges. Additionally, being new to the market can be seen as a weakness.
Opportunities – There are ample opportunities in the market with 21 million surgical operations and numerous hospitals equipped with operating and postoperative rooms. Over 10 million patients experience discomfort due to post-operative hypothermia, presenting an opportunity for Bair Hugger’s technology. Anesthesiologists express dissatisfaction with current hypothermia treatment methods. The U.S. market holds significant growth potential for Bair Hugger blankets utilizing warm-air technology that have yet to establish themselves in the market. Trade shows offer networking possibilities and contract securing opportunities.
Threats – Climator, a foreign product, poses a threat by potentially entering the US market early on and gaining substantial market share advantage over Bair Hugger blankets using warm-air technology.
Hospitals have implemented various techniques to prevent and treat hypothermia. These methods include using warmed blankets, air-circulating blankets, thermal drapes, infrared heating lamps, partial water immersion, and increasing room temperature. Additionally, they employ internal warming methods such as heated and humidified inspired air, warmed intravenous fluids, and drug therapy. The current hypothermia treatments used by hospitals involve costs for substitute products like water blankets, lamps, and thermal drapes. The main challenge lies in determining a competitive price for the Bair Hugger Warming System that will ensure Augustine Medical Inc.’s consistent revenue flow, long-term profitability, and customer retention.
Objectives:
– Maximize sales volume, both in the short and long-term.
– Target hospitals with the highest number of post-operative recovery beds and rooms.
– Achieve breakeven sales volume.
– Ensure sufficient cash flow.
– Build brand loyalty and recognition.
Considerations for pricing strategy:
– Consider the expected demand for the system.
– Take into account the list prices of competitors.
– Evaluate customers’ perceived value for the 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.
Upon entering the market, prices are set higher than the market price in order to enhance perceived value and generate short-term profits. The profits obtained during this period will be reinvested to increase the contribution per unit.
The suggested approach is to implement a penetration pricing strategy, where the product is initially offered at a lower price instead of a higher one. This strategy aims to gain a significant market share. It is ideal for this particular market as it appeals to price-conscious customers by enticing new buyers who may have been hesitant or resistant due to the higher price.
To attract new customers, Augustine Medical can set prices below the average price of competitors. They can also target prospects at larger hospitals to increase sales volume.
Decision Alternative 1: Price skimming will enable Augustine Medical to earn a return on their investments such as start-up costs, advertising, promotions, research, and development. High prices will help build the image of the product and company. Initially, high prices will allow the company to reduce their prices and offer “discounts” when competition arrives.
Drawback: Numerous hospitals tend to extensively evaluate products with a price exceeding $1500, resulting in an extended purchase decision-making process for potential buyers.
Pros: Decision Alternative 2
Company will benefit from economies of scale
This strategy will discourage competition because a new product will be introduced to the market at a cheaper price.
Making the product more appealing and aiding market entry can be achieved by simplifying purchase decisions for buyers.
Cons:
The product may be seen as lower in quality
The company lacks the necessary production and distribution capabilities to meet demand
Competition poses a threat by potentially lowering prices, which could eliminate the company’s potential competitive advantage
After thoroughly analyzing the available options, it is recommended that Augustine Medical, Inc. selects the second decision alternative. Implementing a penetration pricing strategy would result in higher sales volumes and market share, as well as eventually lowering the cost per unit. This is crucial for Augustine Medical, Inc. as they are introducing a new product to the market and potential buyers are highly price sensitive, according to the company’s research. By pricing the Bair Hugger below the average market price, it will be more appealing to buyers and encourage trial usage. It is important to note that buyers may resist testing the product if they have no intention of purchasing it. Augustine Medical, Inc. discovered through research that hospitals with fewer than seven beds are not likely to be receptive to the Bair Hugger Patient Warming System. Therefore, the company should solely target larger hospitals with more beds. Employing a penetration strategy enables Augustine Medical to target both large and small hospitals due to the affordability of their product offering. Currently, direct competitors like Climator pose a significant threat due to similarities in their products. Hence, pricing the Bair Hugger below Climator’s price of $4000 will enhance its attractiveness upon entering the market. Another recommendation is to sell the heater/blower unit separately while offering the blanket as a complementary product.The penetration pricing strategy aims to generate sales by offering a discount on the main product (heater/blower unit) and increasing the price of the complementary product. As the blanket can only be utilized with the heater/blower unit, buyers will be compelled to buy the blanket at a higher cost.
To effectively enter the market, Augustine Medical, Inc. should set a price for their product and provide all information to hospitals and distributor organizations. They should also boost visibility by attending medical trade shows and offering demonstrations to potential buyers. Additionally, establishing a sales force capable of identifying and qualifying potential buyers is crucial. This sales force should utilize both direct selling tactics and guerilla marketing strategies.
Considering that the Bair Hugger will be priced lower than competitors, it is essential for Augustine Medical, Inc. to remain focused on increasing sales volume and capturing a significant portion of the market early on. By creating a portfolio of current and potential buyers, long-term profitability can be ensured through brand loyalty and recognition. The implementation process should be completed within 3-4 months.
