Nicholas J.

Adams
Marketing 463
May 2, 2002

Augustine Medical, Inc.

The Bair Hugger Patient Warming System

Company Background, Description, Culture, and Mission

• In July 1987, Augustine Medical, Inc. was incorporated as a Minnesota

corporation to develop and market products for hospital operating rooms and
postoperative recovery rooms.
• Founded by Dr. Scott Augustine, an anesthesiologist who was convinced that
hospitals needed and desired a new approach to warming patients after surgery.
Dr. Augustine used his expertise in medical knowledge and technical flair to
develop the Bair Hugger.
• Primary objective is to determine how to price the Bair Hugger Patient Warming
System.

Core Competencies

• Creating technology. Augustine is an R&D company. They are not great, or

experienced, in selling, marketing, and logistic control.
• Produce a great product. Rely on relationships with other companies to sell
products.
• Blankets are patented, which is an advantage.

Buyer Behavior

• Not a consumer product. End user is a business. Hospitals will always be

provided with the funds necessary to prevent hypothermia and other diseases, so
the demand will be abundant.
• Interviews with physicians and nurses, followed by a demo of the system, yielded
a variety of responses:
1. Respondents believed that the humanitarian ethic “to make the patient feel
more comfortable” is important.
2. Respondents felt that the Bair Hugger Patient Warming System would
speed recovery for postop patients.
3. Respondents wanted to test the units under actual conditions in
postoperative recovery rooms. They were reluctant to make any purchase
commitments without testing. A typical comment was “No one today, in
this market, ever buys a pig in a poke.”
4. Respondents felt that the product was price-sensitive to alternative
methods. Respondents were very receptive to the notion of using the
heater/blower free of charge and only paying for the disposable blankets.
 Physicians wanted to confer with others who would be responsible for
using the product to administer the warming treatment, however, such as
the head nurse in postoperative recovery rooms and the chief
anesthesiologist.
5. Respondents believed that the pressure to move patients through the
operating room and out of postop is greater than in the past. Efficiency is
the byword.
6. Capital expenditures in hospitals were subject to budget committee
approval. Although the amount varied, expenditures for equipment over
$1500 were typically subject to formal review and decision process.

Competition

Technologies
• Two main competing technologies: surface warming or internal warming.
• Warmed Hospital Blankets are most commonly used treatment for hypothermia in
recovery rooms and elsewhere. Application consists of placing six to eight
blankets in succession on top of patient. Almost all patients receive at least one
application, while 50% of the postop patients require more than one application.
Advantages: simple, safe, inexpensive. Disadvantages: cool quickly, provide only
insulation, and require the patients own body heat for regenerating warmth.
• Water-Circulating Blankets are the second most popular postop hypothermia
treatment. Can be placed over, under, or both. Insulated environment encloses
85%-90% of the body’s surface area. Advantages: widely used and accepted in
severe cases. Disadvantages: heavy, expensive, and can cause water burns at
pressure points, only slightly to moderately effective. Electric blankets are
unaccepted because of the risk of burns to the patient and of explosion in areas
where oxygen is in use.
• Air Circulating Blankets and Mattresses are effective, but not common in the
United States. Advantages: safe, lightweight, more effective than other blankets.
Disadvantages: Bair Hugger uses this technology.
• Thermal drapes are becoming more common in preventative measures. They are
simple, safe, and inexpensive, but don’t transfer heat to someone who is
experiencing hypothermia.
• Infrared Heating Lamps are used for infants. Not commonly used with adults.
Advantages: effective and illuminate the patient for observation or therapy.
Disadvantage: skin needs to be exposed, nurses dislike due to warm work
conditions.
• Partial Warm Water Immersion has been used in the past. Advantages: simple
and it transfers heat effectively. Disadvantages: inconvenient to set up and
requires close monitoring of the patient, which increase labor costs. Water baths
also must be watched for bacterial growth.
• Increasing Room Temperature is the most obvious way to prevent and treat
hypothermia. Advantages: inexpensive and effective when temp. is over 70
degrees. Disadvantage: not acceptable work environments and an increase in
temp. increases the risk of infection.
 • Inspiring Heat and Humidified Air is not accepted for postop because it hinders
observation.
• Warmed Intravenous Fluids are used in extreme cases and are very effective, but
require close monitoring.
• Drug therapy is a temporary solution, and doesn’t really solve the problem of
hypothermia.

Products
• Warmed Hospital Blankets: manufacturers produce heating units for hospital use.
The cost of laundering six to eight two pound blankets averages $.13 per pound.
Heating and laundering costs are included in hospital overhead.
• Water Circulating Blankets: Three main manufactures: Sub-Zero, Gaymar, and
Pharmaseal. Automatic control units $4850 to $5295. Manuel control units cost
$3000. Units may be discounted up to 40%. With discount, prices are $2910 to
$3177 for automatic and $1800 for manual. Average life = 15 years. Costs for
units per year = $194 to $211.80 for automatic and 4120 for manual. Reusable
blankets cost from $168 to $375. Disposable blankets cost $20 to $26. Discounts
cut prices in half, from $84 to $187.50 for reusable and $10 to 413 for disposable.
• Thermal Drapes come in both adult and pediatric sizes. Adult head covers list for
$.49 each; adult drapes list for $2.50 to $3.98, depending on size; leggings are
priced at $1.50 each.
• Air-Circulating Blankets and Mattresses are not sold in the United States by
competitors. The model most suitable for a postop recovery rooms is priced at
$4000 and could be distributed to the United States by 1988.

External Influences

• Patient safety and liability issues will effect the decisions of hospitals.
• Technology changes medicine daily, and beneficial products eventually become
the norm.
• The time frame for the acceptance of the Bair Hugger is varied. The higher the
price, the longer rate of acceptance.

Market Research

• 60% to 80% of all postop recovery room patients are clinically hypothermic.
• Factors contributing to hypothermia include:
1. patient exposure to operating room temperatures
2. heat loss due to the evaporation of fluids used to scrub patients
3. evaporation from exposed bowel
4. breathing of dry anesthetic gases
• See Buyer Behavior section for further research
Industry and Market Size

• Approximately 21 million surgical operations are performed annually in the

United States, or 84,000 per average eight-hour wok day. 5500 hospitals have
operating rooms and postop recovery room. There are 31.365 postop recovery
beds and 28,514 operating rooms in the United States.
• Hospitals with fewer than seven beds would not be receptive to the Bair Hugger
Product.
• One system would be sold for very prospective recovery room beds.

Target Market / Segmentation

• Target market: Hospitals with seven or greater recovery room beds.

• Target market makes up 80% of all surgical operations in United States.
• Segmentation: Augustine needs to make sure that the hospitals perform enough
operations to justify a Bair Hugger.

Technology

• Bair Hugger is very high tech compared to current practices used to treat
hypothermia.
• Technology is new in the United States, so Augustine will be benchmarking this
in America.

Social / Political / Economic Issues

• Malpractice due to negligence is always a concern for health care providers.

Hospitals will want to make operations as safe as possible to void liability, so the
fact that patients will not have to rollover while using the Bair Hugger is a major
advantage.

Product Life Cycle

• The Bair Hugger is in the introduction phrase of the PLC. There is minimal
competition in this technology worldwide. However, there are competing
technologies for hypothermia treatment.

Product

• Bair Hugger Patient Warming System is designed to control the body temperature
of postop patients. Designed to treat hypothermia, a state where a person’s body
temperature is 96 degrees after an operation.
 • System consists of a heat/blower unit and a separate inflatable plastic/paper cove
or blanket.
• Plastic cover was patented in 1986, while the heater/blower unit has no patent
protection.
• Bair Hugger would speed up postop recovery time.
• Advantages over water circulating systems include:
1. warm air makes patients feel warm and stop shivering
2. system can’t cause burns
3. water leaks around electrical equipment is not a problem
4. disposable blankets reduce the chance of contamination
5. system doesn’t require patients being lifted of rolled
• Production is as follows:
1. Subcontract the production of the heater/blower unit
2. Manufacturer the warming covers in-house using a proprietary machine
3. Minor assembly would be required
• The two products work together as one. The blankets are required with the blower
and the patent protects other companies from cutting into the blanket profits.

QFIST

• Quality – The brand image has not been established in the United States. Image
will grow as satisfaction with product increases.
• Features – The blanket is patented and proves to be an advantage. The blower is
not a source of a competitive advantage.
• Image – The Company has no image at the present time, but will create image
through the Bair Hugger and its promotional tactics.
• Service – we are not provided with info about service in the case, but it would
have to compare to competition.
• Technology – R&D and the technology of the blankets is the main advantage.

Placement

• The Bair Hugger would be sold by and through medical product distributors
across the nation. Distributors would be responsible for calling on hospitals,
demonstrating the system, and maintaining inventories.

Promotion

• Currently creating sales literature to be distributed by distributors and at medical

trade shows.
• The distributors will act as the sales force for Augustine and will call on the
hospitals to provide demonstrations.
• All promotions must be geared at the hospital supervisor, surgeons, and nurses
who would be using the equipment.
 • Currently, Augustine is using a push strategy. They are relying on distributors to
push their products on consumers.

Price

From the information given in the case, the following price per patient has been
established for each competing technology.

Warm Hospital Blankets:

• Number of blankets used per customer = 10.5, since 50% of patients receive more
than one application at an average of 7 blankets.
• The cost of laundering six to eight two pound hospital blankets averages $.13 per
pound.
• Laundering and heating costs are absorbed in hospital overhead.
• Total cost per patient is about $2.73.

Water-Circulating Blankets:
• Low Cost Model
o Price of machine = $1800
o Price per blanket = $10/blanket
o I’m assuming that the cost of running the machine is minimal, and is
absorbed in hospital overhead.
o Total cost per patient is least $10.
• High Cost Model
o Price of automatic machine = $5295, average life of 15 years
o Reusable blanket = $375, multiple uses, 25-30 times
o Disposable blanket = $26/blanket
o Again, I’m assuming the cost of running the machine is minimal, and is
absorbed in hospital overhead.
o Total cost per patient is about $26
o Average price per patient is about $18

Thermal Drapes
• Head covers cost $.49 each, drapes list $2.50 to $3.98, and leggings cost $1.50.
• High cost = $5.97 per patient
• Low cost = $4.49 per patient
• Average cost = $5.23 per patient

Other Air Circulating Blankets and Mattresses

• Unable to determine because we do not know the cost of the blankets or
mattresses.
Bair Hugger
• 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. The potential number of operations for Bair Hugger is 16.8 million.
• Each machine will require 1040 blankets per year, assuming 8-hour workdays and
five-day workweeks.
• One unit will be defined as 1 blower and 1040 blankets.
• Using three different levels of market share (growth represented as a percent of
surgical operations) 6%, 8%, and 10%, the number of machines that would be
purchased at each level are: 182 at 6%, 243 at 8 %, and 304 at 10%. The estimate
for each segment was based off a computed 3040.

Porter’s Model

• Supplier Power – there is no supplier power in this market because it so

specialized.
• Buyer Power – much higher buyer power because hospitals have competing
technologies to choose from and can choose a product based on price.
• Barriers to Entry – the main barrier to entry would be creating technology that is
new and useful.
• Threats of Substitutes – very high threat of substitutes. Bair Hugger will be the
best available technology however.
• Rivalry – Competition is well defined, with each competitor offering unique
technology.

B/E Analysis

• Initial investment of $500,000 is believed to cover the fixed cost for the first year.
This includes further R&D, staffing, facilities, marketing, salary coverage, leased
space, and promotional material.
• VC = $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.

SWOT Analysis

Strengthens – The Bair Hugger is a huge technological advancement. Augustine will

enjoy success due to the fact that they are the first to penetrate the United States market.
The blankets provide a competitive advantage for Augustine, thanks to their patent rights
and low costs.

Weaknesses – The Bair Hugger is the only product in Augustine’s Medical line. Success
will depend on it sale and promotion.
Opportunities – By selling the blower for free, Augustine will create a monopoly with
regard to blanket sales. Augustine’s blankets can be sold under the price of water
circulating blankets, and compete in the market immediately.

Threats – Pricing the blankets to high can destroy demand.

Recommendations

After reviewing the Augustine Medical case, I have come to the following
recommendations for strategic implementation. These recommendations will focus
primarily on price, but product, promotion, and place will also be considered when
discussing the overall situation of Augustine Medical.

Product

The Bair Hugger Patient Warming System consists of a blower heating unit and a
patented disposable blanket. As one might assume, the real technology of this system lies
in the patented blanket. Since these two products work together as one joint system, the
demand for the blanket will be abundant. There are no substitutes for the blanket at this
time, thanks again to the patent rights, so Augustine has a premier product to market to
hospitals. Competitors may try to make a replica of the product, but Augustine has
already established itself as a first mover, gaining competitive advantages from the start.
From my recommendations, I suggest that Augustine gives the blower away for free and
focus on the selling of the blankets, which will be discussed later. This will allow the
blanket to be viewed as a superior product, designed specifically with the patient’s best
interest in mind.

Place

Augustine Medical is primarily an R&D focused company. As stated in the case, they are
not great, or experienced, in selling, marketing, and logistic control. To sell their
products, Augustine primarily relies on distributors to demonstrate, promote, and
advertise their products across the United States. Augustine does have limited marketing
status, only preparing literature on the product for their distributors. The distributors are
the proper outlets for several reasons, although they make a 30% margin on the blower
and a 40% margin on the blankets. Even with this fact, it would not be feasible for
Augustine to try to market the Bair Hugger. As stated earlier, they are an R&D company,
and should continue to do what they do best, develop products. Spending the time and
money to setup a nationwide network would not benefit Augustine in any way, and
would go against their core competencies.

Promotion

As the current time, the promotional tactics used by Augustine have been effective.
Augustine has defined its target market as all hospitals with 8 or more recovery beds.
This segment comprises around 80% of the total recovery beds in the United States. The
convenient thing for Augustine is that the target market will not need to be further
segmented. This is due to the fact that the demand for the product doesn’t vary from
hospital to hospital. Augustine also doesn’t need to worry about specific geographic
regions, thanks to its nationwide distributors. Promotionally, Augustine is doing a good
job with this aspect of their business. They are focusing on the correct target market and
using the correct tools.

Price

In order to resolve the issues of this case, price is the main area we need to determine.
When deciding on a price for the blanket and blower/heater unit, I tried to look at the
issue from several standpoints. First of all, initial sales of the Bair Hugger are important
in the first year of growth. As stated in the text, hospitals go through formal decision
processes for any purchase over $1500. With this in mind, I have come up with the
following recommendations regarding price. To effectively sell the Bair Hugger, I
suggest that Augustine sell each blanket at $10 and include the blower/heater for free.
The blower/heater only costs $380 to make and will allow for additional blanket
purchases. The blankets would be sold at $10 to directly compete with the water-
circulating blankets. Selling at $10 will also allow Augustine to gain considerable market
share, and obtain a large profit margin due to a variable cost of $.85.

At a price of $10, and using the market share percentages used earlier (6%, 8%, and
10%), the following profits were determined.

6% = $1,162,752
8% = $1,720,048
10% = $2,277,344

This pricing strategy is being used to grab a high market share. However, if Augustine
wasn’t satisfied with their results, they could lower the price, since a lower price usually
yields greater market share. The greatest advantage for Augustine in my
recommendations is that they will not require hospitals to buy the blower/heater unit, but
include the unit for free. This would allow the hospitals to buy enough blankets for a
month and a half’s worth of demand. By using this method, we bypass the formal
decision process and get our product into the hands of the user immediately. This also
allows Augustine to position itself against competition that may develop a similar product
in the future.

By following the recommendations laid out above, Augustine will have a successful and
profitable future. They will position themselves for any setbacks and future rivalries, and
have the capital to invest heavily in R&D.