Optical Distortion, Inc. case
Daniel Garrison, the president and CEO of Optical Distortion, is thinking about to bring the new and only product, a contact lens for chickens, to the markets. Working with Ronald Olson, the marketing vice president, Garrison is currently developing a marketing plan for ODI’s new product. ODI is planning to introduce these contact lenses to at least one region at the beginning, hoping to reach national distribution in a couple of years. There are three different sizes of the chicken farms that the company faces when they finally introduce the lens, namely small farms (10,000 or fewer birds), medium farms (10,000-50,000 birds), and large farms (over 50,000 birds).
Compared to the debeaking operation, ODI contact lenses for chicken brings the benefits to farmers more than the costs it made. There are several savings for the farmers while using the ODI lenses as the following. In the first place, the mortality rate because of cannibalism drops from 9% to 4.5%, which means ODI lenses are able to help save $0.108 for each hen and save $0.00945 for replacing the dead hens. The additional potential considerable saving is from the feeding cost. It is mentioned that the farmer have to pay $7.04 annually for each hen, while this cost would go down to $6.837 every year resulting $0.204 savings for one inch feeding, thus the farmer can save 0.07655 for 3/8 inch feeding. Furthermore, reducing the trauma by putting the contact instead of debeaking, the extra egg laying will bring the farmers some small benefits about $0.1. Obviously, while farmers choose to use ODI lenses, they have to pay $0.08 for each pair. Thus, the expected value of the lenses to farmers would be $0.2140 (see the calculation details in table1). Table1
Depending on the different sizes of the farms, the total actual expected value for them would be different Table2
While we estimate the expected value of lenses for the farms, we use the average cost and revenue for all size of the chicken farms. As we know the
costs and revenue will be different for different size farms. First of all, it assumes that the labor costs are almost the same for debeaking operation and lenses insertion. In fact, these two labor costs would be different even though the difference is small. If the farms have millions birds, the small difference for one bird still will be a huge saving for the operators. Thus, it is unrealistic to neglect the tiny difference in the labor cost in those two circumstances, which would affect the accuracy of the evaluation. Besides, it is apparent that the unit feeding cost for the small farms would be higher than the large farms. It is because that large farm would purchase the feed in bulk directly from the feed producers, which operate at the perfect competition market, rather than from the retail stores, which means the large farms have the bargain power to press down the expenditure on the feeding. Also, we evaluate the expected value under the assumption that the feeding just save 3/8 inch, which is the least saving for the farmer while using the ODI lenses.
In addition, the expected value is estimated under the assumption that each ODI lenses costs $0.08 for the farmers, but $0.08 is not the real price for the contact lenses in the future. Variable cost and fixed cost are the most important factors to determine the reasonable price. For the variable costs, New World would manufacture the lenses and sell them to ODI at the price of $0.032/pair, and offer injection molds to ODI at a cost of $12,000 each which can produce 15 million pairs in two years. Additionally, the box cost would be $0.42/box for 250 pairs of lenses. Thus, the total variable cost is $0.03448/pair. With regard to fixed costs, there were 521 target farms (birds more than 20,000). Since each sales person should cover no more than 80 farms and there should be 1 technical representative for each 5 salespeople, at least 7 salesmen and 2 were required. We assume ODI produce 20 million pair at first, which means the total fixed costs can be $955,000, and $0.04775/pair (See the details in table 3). Thus, the total cost of a pair ODI lenses is $0.08223. Due to the underestimation of the produce cost for ODI, the expected value for the farmer using the ODI lenses would be overestimated. Once the ODI set up the price more than $0.2940, the expected saving for the farmer who uses the ODI contact lenses would be negative, which means it is less likely to bring the chicken lenses to the poultry industry. In another words, the expected value of the lenses for the farmer could be definitely lower than $0.2140 per hen according to the fluctuation on lenses price.
Depending on the evaluation, we would say that it is easy for the company to sell the lenses to the farmers for the following reasons. One is the feeding efficiency. The ODI lenses will be able to permit the farmers to reduce the depth of feed in troughs by at least 3/8’’, which means the farmers can save the considerable annual feeding cost, especially for the large flocks. If the farm breeds 50,000 birds, the 3/8’’ feeding saving would be worth $3,828. In addition, the ODI lenses would help to avoid the debeaking operation, in which chicken were subjected to considerable trauma resulting in the temporary weight loss and unproductivity. Furthermore, the significantly reduced cannibalism is going to reduce the flock mortality resulting in the ODI lenses attractive to the farmers. In the other hand, the price strategy is going to be the biggest difficult for the company to bring the lens in to the poultry industry. It is unlikely for the company to cover all of the fixed costs and variable costs if the lens is set the price at $0.08. The chicken lenses is the only product the company will have in the future, which means the net income will be negative if the lens price is at $0.08. However, the higher price is supposed to reduce the expected value for the farmer resulting in the reduction on the willing of using ODI lenses. In other words, the price setting is subjective to the non-negative expected value for farmer using the ODI lenses and the breakeven point.