My recommendation to Marvin Koslow is to follow the first approach of pricing Datril at par with Tylenol ($2.85 retail price, $1.69 trade cost), leveraging Bristol-Myers’ brand name, and positioning Datril as an analgesic with similar relief effects to the those of the already successful, aspirin-based Bufferin and Excedin, but more gentle on the stomach, and without the side effects of aspirin. By doing so, Datril will primarily target aspirin users, specifically those from Bufferin’s and Excedin’s current consumer base, who suffer from upset stomach.
I explain my rationale below. According to the case, when Datril was introduced to test markets per the strategy I recommended, it failed to achieve the projected sales figures within the first month. Although I have no access to those sales projections, I could argue that the may have been overoptimistic. The reason is that Tylenol was well established (8% market share) in the analgesic market which has traditionally been dominated by aspirin-based products. Therefore, directly competing against Tylenol at the same price is unlikely to result in quick market share and monetary gains within a month.
Koslow should have allowed more time, say a medium run of 6 months to match duration of the marketing expenses to be committed, before thinking about switching to the other strategy. In addition, it can also be argued that the early success of Datril in the test market with the lower selling price may not be representative of its true performance over the medium to long run. Before defending my recommendation in detail, I would like to highlight the most prominent risk of introducing Datril as a cheaper alternative to Tylenol: not accounting for the competitor’s repositioning or defensive marketing strategies. Those could include the following: o One of the quickest responses that McNeil Labs could come up with is to reduce the price to trade, and subsequently the selling price, of Tylenol to match that of Datril. Doing so could result is public accusations of false advertising, thereby reversing the quick gains that Datril could make, and potentially wasting the $6 million on inaccurate communication of information to the public, which could potentially result in insulted, angry and dissatisfied customers due the feeling that they have been deceived.
Bristol-Myers will have to incur the cost of pulling all current advertisements, and an additional cost of having to launch another advertising campaign. o McNeil could also respond by changing its currently conservative advertising approach (i.e. focusing on physicians and trade) by aggressively advertising Tylenol to the public, exploiting the fact that its current advertising expenditure is less than $2 million a year and possibly even utilizing the power and expertise of the mother company, Johnson & Johnson. This could potentially solidify the sales and market share of Tylenol, making it an even tougher competition to Datril. Given Tylenol’s market share, the speed of executing either one of the above strategies, or both together, could heavily minimize Datril’s penetration of the market. Furthermore, per Exhibit A, Datril will need to sell 13.3 million bottles (at a trade cost of $1.05) or 60 million (at a trade cost of 70 cents) just to break-even.
This is highly inefficient, in terms of both numbers contribution margin, compared to Tylenol. Moreover, given the actual quantities of Tylenol sold in 1974 (around 19.1 million bottles per Exhibit B), Datril’s achievement of break-even quantities seems even more doubtful, given the risks highlighted above. Quality cannot be a differentiation because both products are virtually identical as pain relievers; therefore the best strategy is to combine the well-established reputation of Bristol-Myers, the well-known effectiveness of Bufferin and Excedin, with the value or differentiation being the gentleness of the product on upset stomach.
Furthermore, Bristol-Myers possesses a large consumer base for its aspirin-based products, a base that is larger than that of McNeil Labs’ Tylenol users. This is Bristol-Myers’ main competitive advantage; its own consumers who may suffer from the typical side effects of aspirin. Targeting those specific customers and communicating to them the value of eliminated side effects should be Datril’s positioning and differentiating strategy. Cannibalization from Bufferin and Excedin, should it happen, should not necessarily be viewed negatively, since my recommended selling price of $2.85 is double that of these aspirin products.
Exhibit A – Break-Even Analysis for Tylenol and the different pricing scenarios for Datril (per bottle of 100 pills) Breakeven Analysis for Product Tylenol Approach 1 – Same price as Tylenol Approach 2a – Cheaper than Tylenol Approach 2b – Cheaper w/lowered trade cost $ $ $ $ Unit Cost (Variable Cost) 0.60 0.60 0.60 0.60 Trade Cost (Selling Price to Retailers) $ 1.69 $ 1.69 $ 1.05 $ 0.70 Fixed Cost (Advertising) 2,000,000 6,000,000
6,000,000 6,000,000 Break-Even Quantity [Fixed Cost/(Trade Cost-Unit Cost)] 1,834,862 5,504,587 13,333,333 60,000,000 Contribution Margin (Unit) 64% 64% 43% 14%