Augustine Medical, Inc.

Introduction ( Background and Situation)

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 combat postoperative conditions such as hypothermia. Medical research indicates that 60 to 80 percent of all postoperative recovery room patients are clinically hypothermic. Hypothermia is caused by a patient's exposure to cold operating room temperatures that are required by surgeons to control infection, and for the personal comfort of the surgeon. Hypothermia can also be a result of heat loss due to evaporation of the fluids used to scrub patients, evaporation from exposed bowel, and breathing of dry anesthetic gases. Dr. Augustine's personal experience in the operating room convinced him that there was a need for a new system to warming patients after surgery. Dr. Augustine also realized that the market for this new product would be enormous! Statistics indicate that approximately 21 million surgical operations are performed annually in the United States, and that approximately 5,500 hospitals have operating rooms and postoperative recovery rooms that include 31,365 postoperative recovery beds and 28,514 operating rooms. Upon the realization of this need and existence of the market, Dr. Augustine went on to develop The Bair Hugger Patient Warming System then he acquired a patent. 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. The funds were also used to cover the fixed costs of the company while in its first year. The company subcontracted the production of the heater/blower unit and manufactured the warming covers in-house. The company only participated in minor assembly of the product.

Augustine Medical Inc. planned for The Bair Hugger Patient Warming System to be sold by and through medical products distributors in various regions across the country. Distributors would call on 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.

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 was that the impact it would have on the rate at which prospective buyers would purchase the system, which would in-turn negatively or positively effect the cash flow of the company. The company was also concerned with preparing price literature for its distributors and for trade shows. Price is a very sensitive issue for the company because the level of competition and other similar product offerings that exist in the market. There are a number of products that can be considered direct competitors with The Bair Hugger, 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. market because they have distinct product offering. This could give them further flexibility when choosing their pricing strategy based on how well their product is positioned. The average price range of competitive products is $3000 to $5000. Augustine Medical Inc. should use a price skimming strategy upon entering the market. A price skimming strategy will allow them to charge a relatively high price while entering the market for a short period of time and later lowering the prices when the company is stable. By charging a high price initially the company can build high quality image for its products. Charging high prices will give Augustine Medical the option of lowering its prices when heavy competition arrives. This strategy would also be advantageous to the company upon its initial entry to the market because it will allow the company to regain profit margins from the funds paid to distributors and other intermediaries.

This strategy will eliminate the risk of discounting and losing potential profits because the product will be marked up initially and "discounted" upon the arrival of competition and the growth stage of the products life cycle. Because prices of competitive products are priced high, using a skimming strategy will not pose a threat instead could prove to be more advantageous in the long run.

SWOT Analysis

Strengths

* Simplicity of use

* Compatibility with existing systems

* Bair Hugger stops warms patience faster

* Patented plastic cover

* Bair Hugger has 15 year life span

* Heater/blower unit is subcontracted to cut cost

* Water free heating alternative to avoid leakage and burns caused by traditional products

* Prevents cross-contamination

* Patients are not required to move or adjust in anyway to use device

* Free Trial of product for 2 weeks

Weaknesses

* Augustine Medical is not a recognized company so there is limited brand recognition

* The Heater/Blower unit is not patented

* New to the market

Opportunities

* 21 million surgical operations have operating rooms and postoperative recovery rooms

* 5,500 hospitals with operating and postoperative rooms

* More than 10 million patients experience discomfort and instability associated with post-operative hypothermia

* 60-80% of patients experience post-operative hypothermia

* Anesthesiologists