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
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
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.

 Exhibit 1: Strategic View Price Matrix

Strategic View
Price Competitors Customers

Price makes industry Only a few infertile

‘High’ attractive for couples can afford the
competitors treatment

Right price Our price

Lower incentive for Potentially low
‘Low’
entrants 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 Value Chain Players

Hormone producers start to defend their stake in

‘High’
the value chain
Target share About 13%

Medi-Cult’s position not strong enough before

‘Low’
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

4000000
2
y = -3x + 6440x
3000000

2000000 2
y = -1.28x + 2644.84x
Profits in $

1000000
2
y = -0.44x + 1112.83x
0
0 1000 2000 3000
-1000000

-2000000 Denmark

UK
-3000000
Price pe r Dose $ France
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) 2 + 3399

• Highest profit is at $1080 + $20 = $1100

Exhibit 4: Price Development Over Time

Expected entrance of Extremely

Price competitors (other competitive price =>
Highest profit at IVM producers) IVM becomes mass
low market share market product
(low risk)

$1,100

$20
variable
costs
1st year 3rd year Time

Good price for couples, Market position of
market share, and insurance M-C is stabilized
companies; Combined with against hormone
advertisement that there is producers; Market
something new without knows IVM; Still
hormones 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.