Warner-Lambert
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Executive Summary
In early 1990, Warner-Lambert Ireland planned to launch an innovative new product named Niconil, which was made for people who would like to quit smoking. Niconil would be the first patch-type product in the smoking cessation market in Ireland. While existing smoking cessation products of the other companies had not been successful due to the concerns about negative side effects, Warner-Lambert executives had an optimistic view that Niconil would be recognized as a safe and effective product by prospective consumers. In fact, results obtained through preliminary market research seemed to support their optimistic views. Nevertheless, there were critical problems that should be solved before launching the product as follows:
Which pricing strategy would be appropriate for the new product?
What would be the most effective marketing communication strategy for the new product?
Because effective pricing strategy would be directly related to the companies actual sales and profits, in this case, two questions raised above will be mainly discussed. Advertising and other marketing strategies, such as public relations and sales promotions, will be examined closely related with the discussion of pricing strategies.
Product Evaluation
Niconil
As known generally, it was nicotine that resulted in addictive behavior to smoking. In other words, stopping smoking reduced the amount of nicotine, and made the smokers desire cigarettes to compensate for nicotine needed for maintaining the level of it. Warner-Lamberts Niconil was the product focusing on the addictive aspect of smoking. That is, Niconil was a nicotine-replacement product, and could be used as a substitute for cigarettes. Although there had already been another nicotine-replacement product, Niconil would be the first patch-type product in this market. Compared with competitors chewing gum type product, Niconil could be recognized safer from negative side effects, because nicotine of this patch type product was released indirectly through skin, not directly through mouth unlike competitors chewing gum type product. Although Niconil resulted in some skin irritation, WLI executives regarded this as a minor problem, and thought optimistically that it would be entirely solved in the future. Some results through clinical trials supported the effectiveness of Niconil on helping people quit smoking.
Support Program
Unlike existing smoking cessation products, Warner-Lamberts Niconil was the first product focusing on both physical and psychological aspects of smoking, because psychological addiction was also critical aspect of smoking behavior though patch product would be helpful for reducing physical symptoms of smoking. To focus on the psychological aspects, WLI executives prepared a program supporting Niconil patch product. While patch product could not be sold directly to consumers without prescription, the support program could be sold to consumers directly without prescription, if they were separately packaged from the patch product. Moreover, the supporting program could be advertised nationally, while Niconil patch product advertising was restricted in medical magazines. That is, Niconil could build brand awareness effectively using the supporting program. There were two options which WLI executives should make a choice before launching the product. This support program could be sold separately at additional cost or presented free of charge when consumers buying Niconil patch products. In addition, there were two alternatives of distribution of the supporting program. One option was to concentrate on doctors prescribing Niconil, while the other option was to distribute support programs primarily to pharmacies. Of course, WLI executives could use these two options simultaneously.
Before making a decision, it would be extremely important to take cost and benefit of these options into consideration. Development cost of the supporting program was ÐЈ3000, and a variable cost per unit was ÐЈ3.50. Because of the limited budget, it should be examined under the consideration of overall pricing and communication strategy.
Market Evaluation
Overall, total population of Ireland was about 3.5 million in 1989, and 0.75 million people (30% of 2.5 million adults) were smokers. That is, the total potential market for smoking cessation products was 0.75 million. WLI executives estimated that those who tried to stop smoking each year were 75,000, and assumed that Niconil could be sold to half of that number. Therefore, target market size would be 37,500 people, and then, WLI expected that 100% of the estimated consumers would purchase Niconil at first time. After that, 60% of the target customers would buy another two-week supply and finally, 25% of that number would purchase a third-week supply. According to results of test trials, about 75% of smokers finished the Niconil program within 6 weeks. If they did not take remaining 25% of smokers into account, the total expected unit sales could be calculated as follows:
1. Total target consumers : 37,500
2. 60% of No. 1 (those who would purchase a second two-week supply) : 22,500
3. 20% of No. 2 (those who would purchase a third two-week supply) : 4,500
Total expected unit sales : 37,500 + 22,500 + 4,500 = 64,500
This number might be regarded as a minimum expected unit sales, because remaining 25% of smokers who did not complete the program in test trials was not included in this calculation. If taking those people into account, the expected unit sales would increase.
Pricing Strategy
WLI executives had two options of pricing. First option was to position Niconil in the same price range as cigarettes. In other words, the expected retail price per unit would be ÐЈ32.00. On the other hand, second price option was to place Niconil in the premium price range. Under this second option, the expected retail price per unit would be ÐЈ60.00. Breakeven analysis would be very helpful for examining these two options.
First option
Expected retail price : ÐЈ32.00
Price before Value Added Tax (Value Added Tax : 25%) : ÐЈ25.6
Price before Retail markup (Retail markup : 50%) : ÐЈ12.8(manufacturer price)
Variable cost per unit