Augustine Inc.

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