Tobias Spindler, Tomas Voska, David Kiss, Sahar Erfani IDENTIFICATION OF ISSUES AND RECOMMENDATION

Transcription

1 International Marketing and Brand Management - Case Analysis Medi-Cult Tobias Spindler, Tomas Voska, David Kiss, Sahar Erfani IDENTIFICATION OF ISSUES AND RECOMMENDATION In introducing the In Vitro Maturation (IVM) procedure and medium, Medi-Cult faces two decisions of paramount importance in regards to the pricing considerations: 1. Should Medi-Cult adopt a skimming or a penetration strategy? 2. Should Medi-Cult apply a multi national, regional, or global pricing scheme? We decided that a penetration (i.e. relatively low price) strategy in combination with regional price harmonization would be most advantageous. For the US market, skimming is optimal. In the long run, the price should be lowered in response to the competitive situation. Qualitative Analysis Financial Aspects Setting the prices relatively low at, say, $1,000 per dose, would reduce the overall profit. It is doubtful, to say the least, that the increased volume could hold profits even. We believe it to be inherent in the nature of medical products, that prices play a secondary role. Especially in countries, in which the government or insurance companies pay all or much of the cost, the price elasticities can reasonably be expected to be low. On the other hand, there is something to be said for penetrating the market and establishing IVM as the routine procedure. However, a learning-curve-effect argument for lower prices and higher market shares can be neglected, since the production cost are extremely low to begin with (a maximum of about two percent, even at prices of about $1,000). Marketing Aspects The number one question from a marketing standpoint would be concerning the price fairness of a high price policy. While production cost can certainly not be used to argue for a higher

2 price, high R&D expenditure can. Also, the value is crucial. The innovation saves U.S. customers more than $3,000 while customers in the rest of the world save about $1,500. Prices below these levels can easily be defended with overall savings (e.g. through reduced costs for hormones). Further, high launch prices help establish a quality prestige. The high quality of the procedure for the women also deserves mentioning. With such significant improvements, lower overall cost for the procedure will not be expected (compared to IVF). For clinics, it is important to be at the cutting edge, dismissing the importance of prices. Also, it is certainly easier to reduce prices later than having to raise them, as customers value losses stronger than gains. Finally, consideration has to be given to the issue of ethics and the the price of a child? Game Theory Aspects The higher the market share of IVM, the more will producers of hormones suffer from the fact that the new procedure only needs ten percent of the hormones compared to IVF. Those multi million dollar companies will be less likely to retaliate aggressively if Medi-Cult captures a relatively lower fraction of the market. Especially in markets like the U.S., where the expected penetration rate lies below two percent for the first year, Medi-Cult might be able to operate underneath the radar of the big hormone producers and build up financial resources for later court battles. Also, Medi-Cult can build on its first mover advantage and gradually reap the consumer surplus until the competition catches up. On the other hand, lower prices would have the advantage of making the segment appear less attractive for possible entrants. However, the possibility of reducing prices later might threaten potential entrants sufficiently. Also, governments and insurance companies that subsidies the treatment can be expected to pressure Medi-Cult for lower prices. International Price Harmonization The most important argument for a multi national pricing strategy is the likely presence of different price sensitivities since the respective governments and insurance companies differ in the degree to which they subsidize the treatment. It could for example be expected that French

3 clients are less price sensitive, with the government paying for the first four treatments, than UK clients. On the other hand, a number of factors promote a more standardized pricing decision. The integration of the EU will make it hard to effectively hold up several price levels within the union. Since the value/ shipping-cost ratio is relatively high for the product, arbitrage possibilities exist and the market will harmonize prices automatically. For this reason, we recommend to adopt a relatively narrow price range for the European market. The U.S. market in contrary can be considered to be somewhat separate. The differing currency, higher shipping cost, and regulations imposed by the FDA make arbitrage activities more costly and hence, Medi-Cult should attempt to push for a higher price level in the U.S. Quantitative Analysis The IVF medium sells for about $50 per dose. Of this, about 30% or $15 are variable production cost. The variable selling expense can only be estimated to be lower than $35 since the Medi-Cult would otherwise have no short-run incentive to sell the medium. The variable cost for IVM aren t much higher; So even in a scenario of very low cost ($700), the contribution margin would be about 93% of the revenues. For more realistic price- (over $1,000) and cost levels (below $50), we can treat the entire revenue as contribution. The revenue maximizing price (based on expert opinions) for Denmark is the low price, equivalent to about $1,250. In France, the greatest revenues can be realized at the high price of about $1,430. However, since the realistic price range for Denmark is significantly higher than for France, Denmark s low price is not far below France s high price. For the UK, revenues hit a peak at the medium price of $1,165. Because the price difference between the UK and France would be substantial and because Danish clients are the most price sensitive, the analysis indicates a price near the Danish price level of $1,250. The U.S. market for IVM is totally price inelastic. Therefore, the price should be set near the high end of $2,200. The final decision depends on how difficult arbitrage activities are, due to the regulations for the American health market.

4 Exhibit 1: Strategic View Price Matrix Strategic View Price Competitors Customers High Price makes industry attractive for competitors Only a few infertile couples can afford the treatment Right price Low Lower incentive for entrants Our price Potentially low credibility of product The matrix highlights the previously made point that ethics and the affordability play a key role in the decision making process. Exhibit 2: Strategic View Market Share Matrix Strategic view Market Share High Value Chain Players Hormone producers start to defend their stake in the value chain Target share About 13% Low Medi-Cult s position not strong enough before competitors enter the market The issue of cannibalizing different players from the value chain that are not necessarily directly related to Medi-Cult is emphasized in this matrix. Exhibit 3: Profits Depending on Price y = -3x x Profits in $ y = -1.28x x y = -0.44x x Denmark Price per Dose $ UK France

5 Exhibit 3 shows price-profit functions based on expert predictions from within Medi-Cult. Aggregate formula for total profits in UK, Denmark, and France: profit = 1,573( price) Highest profit is at $ $20 = $1100 Exhibit 4: Price Development Over Time Price Highest profit at low market share (low risk) Expected entrance of competitors (other IVM producers) Extremely competitive price => IVM becomes mass market product $1,100 $20 variable costs 1 st year 3 rd year Time Good price for couples, market share, and insurance companies; Combined with advertisement that there is something new without hormones Market position of M-C is stabilized against hormone producers; Market knows IVM; Still much advertisement => price will rise Reap consumer surplus until competitor enters the market => First Mover Advantage; Then lower prices drastically IVM already amortized R&D expenses Exhibit 5: Price Elasticities by Country Market Elasticity Denmark 2,3 Elastic France 0,57 Inelastic UK 1,6 Elastic USA 0 Perfectly inelastic This table contrasts the different price elasticities in the four countries in question. We can see that the totally inelastic demand in the US maximizes profits at the highest possible price.