A pharmaceutical company is looking at producing a new cold medicine. The firm has devised a new formula that offers relief from symptoms such as congestion, sneezing, aches and pains, and dry cough. It believes that the unique advantage is that its formula is based upon using mostly all natural alternative ingredients. These ingredients act in a unique physical manner that causes relaxation, without excess drowsiness and impact on alertness, while similarly minimizes the possible side effects associated with many cold medicines. The upfront development and capital costs are $250 million.

The market for cold medicines in 2012 was estimated at $3bn. Over the last five years, the market in dollar terms has remained roughly constant. The dollar value of the market in 2007 was estimated at $3.02bn. However, average pricing for one unit of cold medicine has fallen from around $16 to $15, as new products and brand extensions have been brought into the market.

The company has undertaken market research and has developed a series of scores on product features that both rank and measure the relative importance of these features to consumers. The features and ranked scores are as follows:

Effective Cough Relief 1.00

Liquid Form 0.90

Congestion Relief 0.85

Daytime Relief 0.80

Aids in Sleep/Night time Relief 0.52

Pain Relief 0.45

Tablet Form 0.20

A review of the main competitive products indicates consumer impressions of their effectiveness and pricing:

Coldaway Strong on cough and daytime relief, tablet form - $16.99

Theracold Works well on congestion and is in liquid form - $14.99

EaseRelief Provides good relief of daytime pain and congestion, in tablet form - $15.99

The company is looking to develop a liquid product that is particularly effective on coughs and congestion. According to estimates, the company will be able to make 10 million units at a variable cost of $10.00 per unit. Fixed and overhead costs (incl. marketing costs) are estimated at $25 million. The management team had asked the marketing department to advise on a pricing strategy. The team has decided that the best strategy is to sell products directly to select retailers at a mark-up. Standard industry practice is understood to be that producers mark up their price to retailers by an average 20%, and retailers would then mark-up that price by another 10%

Questions:

1) Estimate in 2007 and 2012 the volume of cold medicines in the market.

2) Calculate the ratio of the percentage change in volumes over the percentage change in prices in the market between 2007 and 2012. What does it tell you?

3) Using the cost information, calculate the average fixed and variable cost per unit produced.

4) Determine the price that would need to be sold to retailers. Then calculate the retail price that would be achieved.

5) What price do you feel the market could and/or should bear? Consider the following factors:

The distribution channel considered

Break even volumes at set price level

Sensitivity of volume to prices

Competitor offerings and prices

Need for profitability

Future trends in the marketplace

6) What other marketing efforts do you feel would be required to ensure the price is realized and the product is successful?