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Augustine Medical, Inc.

Mansi Srivastava
2019BLP029
BACKGROUND AND PROBLEM DEFINITION

Augustine Medical, Inc. develops and markets product for hospital operating rooms and
postoperative recovery rooms. The company has developed an innovative product, which they
plans to produce and sell. This product is named Bair Hugger Patient Warming System. The
company wants to know how should they price this product and how to position it.

MARKET AND INDUSTRY ANALYSIS

This product’s target market is hospitals, which has 7 or more beds. Medical research
indicates that 60 – 80% of all postoperative recovery room patients are clinically
hypothermic. There are 21 million surgical operations performed annually in U.S that is
almost 84000 operations per average 8-hour workday. There are around 5,500 hospitals with
postoperative recovery rooms. Research also indicates there are around 31,365 postoperative
recovery beds and 28,514 operating rooms in hospitals in the U.S. The market is mature as
the market is flourished with multiple different technological products. There are two
competitors providing similar product but none of them are sold in U.S. Trend in market look
for feedback from postoperative patients that have used this product to treat hyperthermia.
Respondents believed that humanitarian ethic such as increased patient comfort and increased
recovery speed is more important. Prices of automatic control units that measure both blanket
and patient temperatures ranges at $4850 to $5295 and manual control units are priced at
$3000 although they are at discounted by around 40% which comes around $1800.

EVALUATION OF ALTERNATIVE COURSES OF ACTION

Alternative 1: Price Penetration Strategy

Option 1: In this option company only charges for blankets at higher price i.e. $24 and
provides heater/blower unit without any charge with blanket as promotional offer. This may
create monopoly in the market and as the blankets needs to be replaced, as the demand will
keep growing. As the price is lower there might be low revenue generation initially. The will
be able to generate revenue $3 - $4 (Exhibit 1) million every year.

Option 2: In this option company will only charge for unit i.e. heater/blower unit and no
charge for blankets a promotional offer. They will charge the unit just below $1500 to avoid
scrutiny and review from hospital. By doing so, assume company sells unit at $1499, they
would generate around $3 million revenue (Exhibit 2) and cost company will incur is around
$976220 (Exhibit 2).

Alternative 2: Price Skimming Strategy

In this alternative company prices the heater/blower unit at $4000 and blankets at $20/case.
This may lead to fast generation of funds for company and help in recovering investments and
other cost incurred. But with such high price firstly, there will be delay from hospital, as any
amount above $1500 will have to go through review and decision policy, secondly it involves
high risk and may cause company to get out of market.

CONCLUSIONS AND RECOMMENDATIONS

In my recommendation I would suggest company should go with alternative 1 where


company employs price penetration strategy and company charges only for blankets. The cost
of blankets will be $24/case. This approach might create monopoly in market, as prices are
low when compared to unit. Huge returns can be expected, as these blankets need to be
replaced every time. The unit doesn’t need to be replaced, thus reducing the manufacturing
cost.
Augustine Medical, Inc. Mansi Srivastava
2019BLP029
Exhibit 1:

Heater/Blower Variable Cost $380


Number of postoperative beds 31365
Hospitals having beds < 7 3602
Average no. of beds in these hospital 3.5
Target number of beds 18758
Potential units 2345
Total cost of units $891005
Assuming selling price $1499
Revenue $3514780

Exhibit 2:
Surgical operation performed in U.S 21 Million
Variable Cost of blanket $0.85
Cost incurred by company for a case $10.2
Number of patients suffering hypothermia after
surgeries 14700000
Potential Blanket Market 1225000
Selling Price of Blanket Case $24
Revenue $29400000
Distribution Margin $11760000
Cost of Blankets $12495000

Revenue $29400000
-Distribution Margin $11760000
-Cost of blanket $12495000
-Cost of unit –(Exhibit 1) $891005
PROFIT $4253995

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