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Augustine Medical, Inc.

The Bair Hugger Patient Warming System Yi Zhong T02041522

Problem
The Blair Hugger Patient Warming System is a temperature control machine which is designed for patients after operations to treat their hypothermia. The main problem of Augustine Medical, Inc. is how to price theses two components of the product and how to position it compared to its competitors. There are a lot of similar products available for hospitals to treat and prevent hypothermia. However, these substitutes also have many disadvantages; Augustine Medical, Inc believes its product is the best among these temperature controls.

SWOT Analysis
Strength 1. The market research indicates there are 60%~80% of operation patients undergo the hypothermia. Its a big target market for Augustine Medical, Inc. 2. The product is easy access for nurses and doctors. It also transported easily. 3. The product makes patients feel comfortable. Respondents said that the system would speed recovery for postop patients. 4. The system cannot cause burns and water leaks around electrical are not a problem. 5. The disposable blankets eliminate the potential for cross-contamination among patients. 6. Warm air makes patients feel warm and stop shivering. 7. Not require that the patient be lifted or rolled. 8. The company use proprietary machine to produce warming covers. Opportunities 1. The products of competitors have many disadvantages. 2. The responses from physicians and nurses are very good. Weakness 1. The disposable cover will result in more inventories and cost. 2. Warming time per patient is about two hours are too long. The long time will make the ill gotten worse. 3. There is no patent protection for the heater/blower unit.

Threats 1. There are many products can be chose by hospital in the market. The Hosworth-Climator who produce a similar product in England and they could be distributing their product in the U.S within the next year. 2. Respondents felt that the product was price-sensitive to alternative methods. 3. One system sold for every eight

postoperative recovery room beds, lesser demand. 4. A big investment for hospital to introduce this kind of product. Capital expenditures in hospital were subject to budget committee approval.

Critical Issues
1. Should company send some products to several hospitals for testing, and receive some comments to develop product. 2. The price set for the Bair Hugger Patient Warming System would influence the rate at which prospective buyers would purchase the system. 3. Price and volume together would influence the cash flow position of the company ($500,000). 4. The company would soon have to prepare price literature for its distributors organizations and for a scheduled medical trade show, where the system would be shown for the first time.

Alternatives
AH No charge of heater/blower and only charge the disposable blanket Fixed the heater/blowers blankets price as competitors. Do more advertising. Pros Hospitals like this strategy. Gain more market share. Build a good brand. Same price makes the Bair Hugger Patient Warming System competitive in the market. Due to low cost, the company would make profit immediately. Low price makes the Bair Hugger Patient Warming System more competitive in the market. Help hospitals to lower costs, build a good relationship. Cons The cost is too high. The company cant afford in the initial stage. The hospital already use the others product may not willing to change. Capital expenditures in hospital were subject to budget committee approval. Make less profit, and need to gain more market share to reach the breakeven. For investors, longer return cycle. Costs $723,440 Breakeven for blankets = 55,391

See appendix

Fixed the blankets price as competitors. Fixed the heater/blowers price lower than competitors.

See appendix

Recommendations
Augustine Medical, Inc can choose the 3rd alternative for initial stage, because the low price can attract more hospitals, then the Augustine Medical, Inc.s prestige and reputation will be raised.

The low price can also up the volume of product to make more profit for company. Also, the company needs to focus on research & development. Develop other new products, and then the new products can be introduced in market quickly, before the competitors adjust their price to low to nullifying the competitive advantage. Otherwise if the single products cant success, the company will meet a huge risk. After the first stage of entering, the company should adjust the price of products and the margin for distributors. Because other companies will try to get back their share by reducing cost and cutting price. Augustine Medical, Inc. may need to do more advertising and promotion to consolidate its position in the market.

Appendix
After reading, we know that the company have $500,000 initial capitalization, and 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. The direct cost of heater/blower unit would be $380, and cost of blankets is $0.85 per blanket. We assume the price of heater/blower is P; the price of blanket is P1. V stands for volume of heater/blower; V1 stands for volume of blanket. Therefore, minimum revenues= $500,000 + (0.3P+380)*V + (0.4P1+0.85)*V1 Fixed cost = $500,000 VC (heater/blower) = 30%*P+380 VC1 (blanket) = 40%*P1+0.85 Breakeven = fixed cost/margin = 500k/ (0.7P-380) + (0.6P1-0.85)

EXHBIT 1
Break-even analysis for postoperative patients who need blankets Surgical operations are performed annually 21,000,000 More than seven beds hospital needed 1-20% =80% Percentage of postoperative is hypothermic 60-80% Patients who need blankets From 21,000,000*80%*60%=10,080,000 To 21, 000,000*80%*80%=13,440,000

Exhibit 2
An estimated breakdown of the number of postoperative hospital beds and the percentage of surgical operations is shown below: Number of postoperative 0 1-6 7-11 12-17 18-22 23-28 29-33 >33 Number of hospitals 1,608 3,602 1,281 391 135 47 17 17 Estimated percentage surgical operations 0% 20 40 20 10 6 2 2 of

In alternative 1: Assume the price of blankets is $24 (same as MTA 4700), because we dont charge the heater/blower, so we could set the price of blankets higher. Due to good product performance assume that we get 25% market share. We have to give out 588 units of h/b. (31,365*60%*25%/8).

Breakeven for blankets= (588*380 + 500,000) / (0.6*$24-0.85) = 53,391 53391/10,080,000 = 0.53% so this situation seems very easy to reach the breakeven point. Total Profit = 21million*0.8*0.6*0.25(0.6*24 0.85) (588*380+500,000) = 33,422,560 In alternative 2: Assume the price of blankets is $20; the price of heater/blower is $1,800. (The lowest price as manual control units $3,000 40% off) Assume we only get 15% market share, because we charge the heater/blower. V = 31,365*60%*15%/8 = 353 Profit of H/B= 353*(0.7*1800-380) = $310,640 Profit of blankets = 21million*0.8*0.6*0.15(0.6*20 0.85) = $16,858,800 Total profit = 16,858,800+310,640 500,000 = $16,669,440 In alternative 3: Assume the price of blankets is $20; the price of heater/blower is $1,499. (To avoid the hospitals formal review and decision process) Assume we only get 20% market share, because our product prices have strong competitive. V = 31,365*60%*20%/8 = 471 Profit of H/B= 471*(0.7*1499-380) = $315,240 Profit of blankets = 21million*0.8*0.6*0.2(0.6*20 0.85) = $22,478,400 Total profit = 22,478,400+315,240 500,000 = $22,293,640 According to the financial analysis above, it seems very optimistic. However, these are just ideal situation; the competitor would do a lot of actions to fight for market share and profit. To my opinion, the alternative 3 is the best choice. It is the most secure way to price our product.