Optical Distortion Notes

I. How much is a pair of ODI lens worth to the chicken farmer?

The value for the farmer is value of substitution in use, in other words substitution of the
existing method debeaking. So the value of a pair is

debeaking over benefit l Incrementa -

ts switching cos

So let us consider the benefits to the farmer per bird per year. The sources of benefits are

1. Reduced chicken mortality.

Mortality reduced from 9% to 4.5%

The present cost of a surviving bird (including dead birds) is = $ 2.61
Less the new cost with the lens is $ 2.40/(1-0.045) = - $ 2.51
_________
10 cents

2. Feed savings

Assume that the feed depth is reduced by feet. Some of you might have assumed that
the feed depth is reduced by 1 foot.

156/2 [Savings for feet per day] X 1/20,000 [savings per chicken] X 158/2000 [savings/lb] X 365 days

This gives us feed savings of 11.25 cents.


3. Savings on egg production

This could be because of less trauma. Based on an one egg increase relative to debeaking
per chicken per annum.

1 egg X 1/12 0.53

This gives us a savings on egg production to be 4.5 cents.

Thus the total calculable economic benefit to the chicken farmer in use over debeaking =
25.75 cents

4. Other benefits:

Some other benefits you might have thought about:

Labor cost of inserting lenses versus that of debeaking. This can be seen as a
wash (220/hr debeaking vs. 225/hr. lenses).
Increased egg production among lower pecking order birds
Less dead birds = less trauma for survivors = more egg production.


Segmentation

In geographic terms California is the largest market. Followed by Florida + Georgia +
Carolinas. The issue is that ODI is a start up with capital of only $ 200K. This might call
for a more focused rather than a broad roll out.

In terms of farm size it is logical to do to large farms and then medium firms. Larger
farms are i) better use of sales force, ii) savings are greater for larger farms iii) larger
farms are more like agribusinesses and can be more easily educated of the economic
benefits iv) larger farms can be reference accounts

Pricing Policy

Variable costs: The variable costs are 3.2 cents for manufacturing. The box costs which
are variable are 0.17 cents. Finally, the injection moulds cost $12,000 for 15 mn. pieces
and can be thought of as variable at 0.08 cents. So the total variable costs are 3.45 cents.


Fixed costs: One could consider high versus low options

Hi Lo
New world payments 25 25
Reg. Office and warehouse 196 196
Salesrep @ 40 k 8reps = 320 5 reps = 200
Tech reps@ 35k 2reps = 70 1 rep = 35
Ad PR 20 5
Trade shows 20 10
HQ expense 184 100 (for 20 mn pairs)


So all the above calls for a pricing strategy that is bounded by a price ceiling (of approx
26 cents) and a price floor of the direct variable costs + overheads.

This leads to the discussion of the factors determining the actual price which we had in
the class and as summarized in the picture below.









Pricing Policy Considerations

1. Penetration versus skimming considerations.
2. Risk faced by farmers. What is the first reaction that many farmers would have?
Might not take the product seriously.

This means that ODI must design schemes to credibly demonstrate the value of its
innovation to the farmers (test marketing programs).

Final Pricing
Decision
Price Ceiling (Demand Factors, Consumer Reservation Prices)
Price Floor (Cost Factors, Direct Variable Costs)
Competition
Risk
Preemption
Market
Penetration
Corporate
objectives
Liquidity
Skimming