Optical Distortion

Introduction

Optical Distortion Inc. is a small new company with a patent for an innovative new product which is a contact lens designed to impair the eyesight of chickens. The analysis in this paper provides recommendations for ODI on their marketing and pricing strategy to launch this new product.

Market Segmentation

There is substantial evidence in the case to suggest that ODI should segment the market based on flock size of the farms and focus their marketing and sales strategy towards farms with more than 10,000 birds. As illustrated in Exhibit 4 of the case study, number of chicken farms with flock size less than 10,000 has vastly shrunk between 1964 and 1969. This trend has continued and it is estimated that between 1975 and 1979 80% of the chicken population would be on farms (3%) with 10,000 or more birds. With limited resources and sales personnel it makes sense for ODI to characterize their served available market (SAM) as medium and large farms only and not focus on small farms at all.

Besides, Small farms have smaller henhouses and cannibalism in birds may not be a real concern for these farmers. The production loss because of cannibalism may not be large enough to make ODI's product appealing to these customers. Also, Garrison believes that a farm would have to have at least 10,000 birds to be sold profitably by ODI. With these arguments and the fact that small farms market segment has been declining at a rate of 25% every year, ODI can wisely exclude this segment from their marketing focus.

Geographically, ODI should focus on the pacific region, starting with California and Oregon because that's where ODI's lens has been tested on a number of farms with satisfactory results. Acquiring 20 farms in just two Southern California counties can give them an impressive start with a market penetration rate of 7% in the first year. As they acquire farms in California, ODI should extend their operations to North Carolina and Georgia which along with California account for 25% of the nation's chickens. Eventually ODI should spread their regional offices to serve chicken farmers all over the country.

Value to Farmers

Contact lenses from ODI restrict the vision for the birds which completely changes their behaviour. This method of reducing cannibalization is much more effective than debeaking and has huge economic benefits for the farmers. The benefits for ODI lens are

* Reduced cannibalization (4.5%) as compared to debeaking (9%)

* Greater feeding efficiency - A farmer with 20000 bird flock could save 156 pounds of feed per day which amounts to a saving of $4500/year

* Unlike debeaking, contact lenses from ODI do not cause any trauma in the birds

* Debeaking causes greater social stress because establishment of peck order takes longer among debeaked birds.

As explained in Appendix A, ODI's contact lenses, when compared with debeaking, provide an estimated cost savings of approximately $94 for every 250 birds.

Pricing Policy

ODI is defining a new technology and product for the target market and given the fact they have already had several successful trials with farmers in California and Oregon, I believe they should follow the market-skimming pricing strategy. Since ODI is the only player in the market and the fact that they do have a sufficient number of buyers for their product they should be able to charge a higher operating margin for their product. For every 250 birds a farmer saves $94. Allowing farmers to keep most of this savings ODI can ask for roughly 40% of these savings as the price for ODI lenses. Assuming that ODI starts with a penetration rate of 6-7% in the first (1975) year and doubles up for the next two year, they should have extracted enough profits out of the market. As the competition starts to crop up in late 70s or early 80s they should reduce the margins to discourage entry of competitors. Table 1 below summarizes the pricing and penetration rate that I forecast for the next 5 years.

1975 1976 1977 1978 1979

Penetration Rate 6% 15% 30% 40% 50%

Price per box of 250 lenses 39.99 34.99 34.99 29.99 24.99

Table 1 - Penetration Rate and Pricing Forecast

Appendix B - provides the complete financial model based on this forecast. Some of the advantages of an initial high pricing strategy are: 1) the high initial price does not attract competitors from the market 2) it communicates the image of a quality product 3) can extract the maximum revenues from the market while facing no competition from other vendors, 4) leaves room for initial promotions or bulk discounts. By 1979 ODI would have already gained enough market-share to effectively use economies of scale to bring down their average costs allowing them to further lower their prices. A lower price will discourage firms from entering the market as potential competition.

There are some clear challenges facing ODI in terms of implementing the above strategy. Higher initial prices would require ODI to hire some best-in-class sales people who can justify the price to farmers by