It was by pure accident that Rue Dayal stumbled upon the idea for Chik'aLens. While visiting a soybean farm in the summer of 2022, he overheard the owner discuss how a few of his hens that had been afflicted by cataract had started exhibiting exemplary behavior. When asked, the farmer had indicated that these hens had stopped displaying the aggressive behaviors typical of hens that are grown for their eggs, and that these birds had become relatively docile. When the farmer observed '... and now I wish all my hens had cataract', Rue Dayal realized that he had discovered a new business idea.

After extensive research, Rue learned that the reduced vision symptomatic of cataract could not be duplicated in hens using chemical, genetic, electro-mechanical or laser technologies - at least not in a manner likely to win approval from regulatory agencies and animal rights activists. By November 2022, Rue was ready to discard this business idea when he had a lucky break. Katarina, his six year old daughter, insisted on dressing up as a witch for Halloween and demanded red tinted contact lenses to complete her costume. When Rue visited the local party supply store he found that they sold contact lenses with different colors and patterns, and he wondered how people could see through some of the patterns printed on the lenses. It was then that he had the realization that cataract-like reduced vision could be induced in hens merely by putting colored and patterned contact lenses in the eyes of the birds. Rue Dayal obtained a patent for a vision-reducing contact lens for hens in the summer of 2023, at which time he started a new company named Chik'aLens Inc.

Since the process of placing contact lenses in the eyes of the hens was relatively labor intensive, the lenses had to be durable enough to last the entire twelve month commercial life of an egg laying hen. (Commercial egg laying hens produce reliably for about 12 months after which the birds are 'repurposed'.) This necessitated the use of certain polymorphic trans-polymers which were not suited for human use. In the Spring of 2023 Chik'aLens Inc. entered into an exclusive contract with the Yan Li Opticals (YLO) in Guangzhou, China whereby the Chinese company agreed to not supply the lenses to other firms for non-human applications and in turn Chik'aLens Inc. agreed to pay YLO a sum of $210,000 ($105,000 in each of the first two years) and to purchase all their lenses from YLO. Further, Chik'aLens would supply YLO with specially designed injection molds (each of which cost Chik'aLens $124,000, and which had an expected life capacity of 10 million lens pairs). YLO would supply Chik'aLens with the lenses at a bulk price of $0.235 per pair regardless of quantity1 .

More Than You Ever Wanted to Know About Chicken

Chickens like many other animals are a social creature and have a well-defined social structure. By the age of 2 to 3 months, the chickens form a 'pecking order' through the process of pecking and other forms of fighting. If a bird low on the pecking order were to inadvertently stray into a more dominant bird's territory she would be mercilessly pecked. If a submissive bird were to dare raise her head too high, it would be pecked by one or more of its dominant neighbors until it lowered its head in submission. The amount of time spent at the feeding trough was determined by the pecking order. It was not uncommon for the more submissive birds to be pecked to death or to die from starvation. The submissive birds that survived usually produced fewer eggs because of the trauma they faced on a daily basis and because of inadequate feeding. Once a bird died, replacing it with a new bird seriously upset the established pecking order, thus creating renewed violence among the birds, and so this was not usually done. Starting in the mid-1920s, poultry farmers in California started debeaking the hens. While debeaking did not stop the birds from forming a pecking order, it prevented the birds from doing much harm to one another. Debeaking involved using a hot surgical knife to cut the upper and lower beaks at slightly different lengths. The cut ends of the beaks were cauterized using a hot blade to reduce the bleeding and to prevent infections. The overall operation was painful, however, debeaking resulted in the mortality rates among chicken to fall from 30% (for birds without debeaking) to 16% (for debeaked birds). The debeaking operation was usually performed just before the hens began their commercial egg laying life, by a crew of three experienced contract workers each earning $18 an hour. A team of three workers could debeak approximately 75 birds each hour.

The Chik'aLens Alternative Testing done at the Pioneer Poultry Farm had established the effectiveness of these lenses. Rue Dayal and his team had designed slightly oversized contact lenses that reduced the chickens' depth perception to a mere 12" while severely impairing their peripheral vision. This forced the birds to keep their heads lowered so that they could see the feed. Further, the red tinted lenses made it difficult for the birds to discern the red combs on the heads of the other hens, and thus made it difficult for the birds to positively identify one another. This combined with the reduced depth perception and the lowered heads caused the birds to not form a peck order which then resulted in significantly lower levels of chicken mortality - a mere 5%. Accountants and the managers at Pioneer Farm have estimated that for every bird that is saved from cannibalization through the use of lenses, the farm's profit increased by $2.902 over the lifetime of the bird (this is over and above the increase in egg production caused by the elimination of the debeaking trauma; also this does not factor in savings in feed cost, the price of lenses, the labor to install lenses etc.) This estimation is very complicated, and takes into consideration that the birds die at various stages in their lifetimes.

(1 While the $100,000 payments to YLO should be treated as a fixed cost, the cost of the injection mold, the box costs and the cost of the lenses should all be treated as variable costs. 2 As far as the $2.90 goes, that is the extra profit from every bird that is saved from cannibalization. Since there is a 11% reduction in cannibalism the savings from reduced cannibalization per bird would amount to 11% of $2.90.)

Rue estimated that a crew of two trained contract workers could install Chik'aLens lenses on 50 birds each hour. These workers would each charge $20 an hour. The insertion of these lenses (which would stay in the eyes of the birds for the rest of their lives) did not cause any trauma and these birds exhibited neither weight loss nor any loss in egg laying capacity. Rue had discovered that these lenses could not be reused when the bird had come to the end of its commercial egg laying life since almost all attempts to remove the lenses from birds had resulted in serious damage to the lenses. Further the sterilization process would cause the polymer material to melt or warp. Rue believed that in addition to reducing chicken mortality and egg laying loss caused by trauma, the Chik'aLens lenses could save poultry farmers a lot of money on feed cost. Since debeaked birds had beaks of different lengths, they required the feed troughs to be filled with feed to a height of at least ". Further, they drooled a lot because of the mismatched beak lengths. Chicken that had not been debeaked could feed from troughs with feed levels of just ". Dr. Reyn of the Chapman University Poultry Research Center estimated that a " reduction in feed height would reduce feed wastage (due to billing and scattering) by 1.4 pounds per 100 birds per day. Most poultry farmers buy chicken feed in bulk at $235 a ton (a ton is 2000 pounds).

The Egg Business

The poultry industry in the United States is dominated by the larger farms with a small number of the farms accounting for a very large percentage of the 600 million commercial egg laying hens in the country (see Exhibit 1). Of all the regions in the United States, Southern California has the largest concentration of poultry farms. Since the 1980s, the concentration of egg laying chicken in medium and large farms has been increasing while very small farms (those with fewer than 20,000 hens) have accounted for diminishing numbers of birds. The small farms (20,000 to 49,999 birds) are owned and managed by the farmer who makes all the administrative and managerial decisions. These farmers contract specialized tasks (such as accounting) to outside agencies since they lack in-house manpower for such operations. The medium and large farms are like small manufacturing operations with a very sophisticated level of management, employing many people with specialized skills including experts in marketing, accounting, finance, and operations. Rue Dayal was convinced that it made no sense for him to target the many thousands of poultry farms which had fewer than 20,000 birds. Further the selling of the contact lenses for hens would require the extensive use of sales people, and he wanted to confine the marketing of his product to the poultry farms in the Southern California region. Each egg laying hen lays approximately 253 eggs during its commercial egg laying life of 12 months. After the birds have laid eggs for a year, their eggs output falls to below the level where they are deemed financially viable. At that point the birds are culled and their remains are sold to various buyers including pet food companies. These birds are considered unfit for human consumption since their meat is not tender. The average profit for the poultry farmer per dozen eggs3 , (after factoring in all the fixed and variable expenses) amounts to a mere $0.056 per dozen eggs

The Marketing Plan

As Rue Dayal and his team began working on a marketing plan for Chik'aLens, they realized the need to think big, while at the same time taking into consideration their limited resources (see Exhibit 2 for Chik'aLens Inc.'s current balance sheet). They had already decided that they would begin operations by targeting poultry farms in Southern California. The annual costs of a SoCal regional office and warehouse would be about $260,000 per year, plus about $75,000 per salesperson (including expenses) and $67,000 for each technical representative (including expenses). The role of the tech. rep. was to follow up all the major sales and make sure that the lenses were being used in a manner that would maximize the benefit to the farmer. Each sales person could cover a territory of no more 3 (The slightly increased supply of eggs due to the reduced mortality and increased egg laying is not expected to result in lower market prices for eggs.) than 70 farms, and one tech. rep. would be needed for every 4 salespeople. The firm's limited resources would limit them to only 3 salespeople and 1 tech. rep in the first year, perhaps expanding to 8 sales reps and 2 tech. reps. by the second year when penetrating the market becomes more difficult as the easier sales would have been made in the first year. Rue felt confident that his firm could penetrate 25% of the farms targeted in the first year if he could provide the farmers with convincing arguments to buy into the lenses. He felt confident that he would have a penetration of 35% of the total farms targeted in the second year (since Chik'aLens would have a larger sales force and would be targeting more farms, the 35% penetration in year 2 means that they would have many more farms penetrated in year 2 compared to year 1. The 35% penetration for year 2 includes the farms penetrated in year 1). To support the sales force, Rue planned on spending $130,000 per year on advertising, and $35,000 on trade shows in each of the first two years. Headquarters expenses were estimated to be $85,000 in year one and $120,000 per year subsequently. In addition, Rue wanted his firm to be more than a one product business and this meant spending an annual R&D investment of $250,000. In fact, Rue was ok with the business merely breaking even for the first year (a profit in the second year would be great by him), as long as he could generate the $250,000 surplus needed to fund R&D. Rue knew that he had to decide on a price for the lenses. Though the lenses are sold in boxes containing 250 pairs of lenses, he found it beneficial to think of the lens price on a per bird basis (i.e. per pair of lenses) since that is how his clients - the poultry farmers - thought. The plastic boxes would cost his firm $1.50 each, and the cost of filling, order processing and shipping would cost his firm $1.75 per box.

Rue realized that he had to set a price for the lenses that would provide his firm with a tidy profit while still being attractive to the farmer. He was hesitant to set an initial low price and raise it later since he realized that the poultry farmers would see that as price gouging. Rue knew that the key to his business' success lay in having a high contribution to support the regional office, the advertising and promotional costs. He wanted to start expanding to markets outside of Southern California starting in the third year

To be solved:

1. What characteristics of the Chik'aLens lenses are likely to make it appealing or unappealing to different types of chicken farmers? In particular, calculate the relative financial advantage to farmers of using these lenses versus debeaking on a per chicken basis4 .

2.What pricing policy should Chik'aLens adopt? (This should be the major focus of the analysis; make sure you calculate the savings to the farmer on a per pair (i.e. per chicken) basis, and also the break-even volumes at various price levels

All Farms Small Farms Medium Farms Large Farms (Flock size 1,000 +) (Flock size 20,000 - 49,999) (Flock size 50,000 - (Flock size 100,000 +) 99,999) Exhibit 1 All farms # Chickens on # Farms # Chickens # Farms # Chickens # Farms # Chickens (incl. very all farms small farms) All U.S. 400,000 600,000,000 3,036 123,203,426 709 62,711,148 362 113,361,254 Southern 4,203 69,000,000 351 14,624,436 121 11, 177,612 95 35,643,216 California Exhibit 2: Current Balance Sheet Cash $200,000 Patent (estimated value) $100,000 Total Assets $300,000 Current Liabilities $0 Long-term Debt $0 Stockholders' Equity $300,000 Total Liabilities and Equity $300,000