Does market skimming (AKA price skimming) make sense here, and, if so, what price do you arrive at?
Market Skimming also called Price Skimming is a commonly used technique for niche products. In this method of pricing, firms typically price their products very high during the introductory stages (usually for a short/medium term). The objective is to skim off customers who are willing to pay more for the product to have the product sooner. Usually, the products that using price skimming are potential market leaders or innovators thereby grabbing a large share of the market.
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More than often once a substantial market share is captured due to first-mover advantage, competition catches up quickly forcing the price to be lowered progressively. In the case of Cook Inc, the “Gianturco-Roubin Coronary Flex-Stent” is a market innovator.
Though the competition is working on similar products, it is noted that it took Cook Inc, five years of a human clinical trial (1987 – 1992) before the FDA could approve this product as saleable. For lack of any additional information about the competition, we could safely assume that the competitors are in the early stages of product development and it could take them up to 5 years to launch a competing product approved for use by FDA, thereby providing Cook Inc, 5 years to remain the market leader in “Gianturco-Roubin Coronary Flex-Stent”.
|Particulars||Pricing at US$80||Pricing at US$250|
|Salary (6 Sales Rep * $45000)||270,000||270,000|
|Seminar & Training (24 events * $7000)||168,000||168,000|
|R&D Expense¤($450,000/5 years)||90,000||90,000|
|Total Fixed Cost||528,000||528,000|
|Unit Variable Cost||55||55|
|Contribution Margin (CM) per unit||25||195|
|BEP (Units) = Fixed Cost / CM per unit = (528,000 / 25)||21120||2708|
Assumed that R&D Expense would be amortized over 5 years rather than expensing during 1st year. Thus at US$80 per unit pricing (market rate) Cooks Inc., needs to sell 21120 units to break even. As Cook Inc., enjoys the early mover advantage, we recommend using the price skimming strategy to sell “Gianturco-Roubin Coronary Flex-Stent” at US$ 250 per unit during the initial period while they enjoy growing market share.
What prices are suggested by demand and value pricing methods? Does such an approach make sense for the situation in which Cook finds itself?
Demand pricing is the pricing method in which customer response to various price points within a given range of price is documented and then the highest acceptable price is arrived at. It is noted by the case study that 30,000 angioplasty surgeries are performed each year and 30% of them require bypass surgery. In other words, this translates to a niche market for Cook Inc, creating a demand for “Gianturco-Roubin Coronary Flex-Stent” during 10,000 surgeries each year. Brian’s projection of 700 units in sales during the first year translates to a 7% demand for the product.
Value-based pricing also commonly known as value optimized pricing is the process of pricing products reasonably based on the value perceived by the consumer. In the case of “Gianturco-Roubin Coronary Flex-Stent” produced by Cook Inc, it is proven through research that the cost of balloon angioplasty plus stent is about one third the total cost of balloon angioplasty followed by bypass surgery. More importantly, the success rate measured by the absence of in-hospital heart attack, bypass surgery, or death was at 99.3%. These two proven factors would certainly drive customers to find value in “Gianturco-Roubin Coronary Flex-Stent”.
But unfortunately, the concept of value pricing cannot be applied to this product. The primary challenge of value pricing is that each customer perceives “value” differently and the need for metrics for measurement (potential future cost savings etc). As pricing information on angioplasty and bypass surgery is not provided, value pricing as a concept may appeal to this product but is not practically feasible to implement for this product.