EMBA INTAKE II

DATRIL
Case Study

Prepared by:

Rahul Pathak
18 May 2012

1. BACKGROUND
This is a case study on Datril, a new non-prescription acetaminophen drug, about to be launched in the Spring of 1975.

2. PROBLEM RECOGNITION
A lack of consensus afflicted Bristol-Myers strategy on
1)

how to position Datril

towards the public and 2)how to price and promote it. Bristol-Myers needed to not only recognize, but also visualize the impact of these issues prior to the launch. Challenges at multiple levels ranged from whether to promote Datril as a direct point of sale towards the consumer. The impact this would have on the market share of Bristol-Myers other aspirin-based analgesics. The measure of success in leveraging on familiarity and trust that the consumer felt with the Bristol-Myers name and its existing portfolio of aspirin-based drugs. The ratio of increase in revenues to the cost of advertising, based on the decision to go direct. Most of all, whether to take on this strategy, different from that of the only other acetaminophen-based drug Tylenol. Or, to adopt the traditional and more conservative route as that of Tylenol and promote Datril towards the trade only. Last but not the least, set a level of price that would allow Datril to compete with Tylenol, given a like for like functionality.

3. OPTION LISTING
A test market situation provides a first glimpse, but it is not akin to the real environment where a possible element would be the time it takes to create brand power. As a result, one should not rule out the strategy of reference pricing Datril to Tylenol, in spite of it failing in test market conditions. In contrast, the likely success of
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penetration pricing, outside an accomplished run in a test environment, needs careful evaluation prior to deciding on it as the launch strategy. Importantly, McNeil Labs moves pursuant to the actions that Bristol-Myers takes, needs to be anticipated. Additional elements to consider in the process of positioning, pricing and promoting could be a different customer segment the aspirin user, or a different channel to the 2 known ones pharmacies and grocery stores; physicians and medical professionals.

4. RECOMMENDATION
The ingredient for Datrils success is acetaminophen, in a pot which is already brewing with consumers making the switch from aspirin. The stew is Datril and it only needs the chef in Bristol-Myers to present it as an attractive offering. To dress the final offer on price alone, low or equal to Tylenols, will only induce an equal or more aggressive action from McNeil Labs. The market for analgesics is evolving and the key lies in appealing to the current aspirin user. A Tylenol user is already an acetaminophen convert and there is no value for him to change to Datril, so long as McNeil Labs counter-acts on any BristolMyers pricing moves. A 90% share of the aspirin market is dominated by 3 players of which 2 are Bristol-Myers brands. Herein lies the value of a market-growth strategy. Attracting current aspirin user will no doubt also benefit Tylenol, while at the same time hurt Bristol-Myers own aspirin brands. A vertical brand extension using Datril as the upscale brand, positions it at a potential $680 million dollar market of which Tylenol/acetaminophens current share is a mere $55 million.

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5. ANALYSIS
As a product, Datrils value proposition is in its offering as an acetaminophen-based drug. An analgesic perceived superior to the aspirin-based alternatives due to fewer side effects; with a functional value similar to its only competitor Tylenol; in a market experiencing exponential growth. To develop this value proposition into a distinct offer requires an assessment of its value for the customer, the advantage it brings relative to the competitors offerings, and its value to the business enterprise itself. 5.1 Customer value

From a functional perspective Datril offered a greater inherent value; that of raising the pain threshold and reducing fever without having any anti-inflammatory effects of aspirin. This should make it more likely to be adopted. Monetarily, a lower retail price of $1.85 and a price to the trade of $1.05 was a superior cost benefit to that of Tylenol, retailing at $2.85 with a trade price of $1.69. Psychologically, pain relief medicines in general and the acetaminophen ones in particular, conveyed a sense of feeling better. 5.2 Competitive advantage

The functional benefits of Datril were similar to that of Tylenol, giving it competitive parity and a level playing field, in spite of being a new entrant up against a known, well established brand. It also seemed to have competitive strength of brand association and brand recognition, given that the Bristol-Myers name and range of products were heavily advertised on television, magazines and newspapers. McNeil
3.

Labs on the other hand had a promotion strategy for Tylenol, limited to physicians and the trade. The advantage of being the first mover in the acetaminophen segment gave Tylenol a captive yet growing market, with an 8% share. Datril faced an uphill task breaking into Tylenols customer base. 5.3 Company value

The existence of Bristol-Myers as a business enterprise is in its ability to manage profitable growth. Profitability can be achieved by either increasing revenues or by lowering costs. Bristol-Myers strategy of pricing Datril $1.00 cheaper than Tylenol is an example of increasing revenues by growing sales volumes, with lower price than the competitors offering. An alternate strategy to growing revenues involves reducing costs. For example, Tylenols advertising costs of $2 million a year compared to Datrils planned advertising expense of $6 million over 6 months, gives it a higher contribution margin (see Exhibit 1). Datrils goal was to solidify Bristol-Myers position in the analgesic market and gain share in the rapidly growing acetaminophen market. Because the acetaminophen market was dominated by Tylenol, it was only natural that the strategic options that Bristol-Myers was considering and the additional ones listed, take the goal and the threat to achieving it, as the primary objective. Reference pricing Consumers do not always evaluate prices objectively. Often a referenced price is a known and available price, like that of a competitor. Pricing Datril at par with Tylenol and advertising it as a new substitute with same features may have been a fraught

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tactic in a short-run test environment, but in time could have proven to be successful. Had Bristol-Myers maintained its first approach and leveraged its name and its known brands, it may have been able to generate a favorable consumer response because of their association of Datril as a Bristol-Myers product. The approach ticks all the boxes of value to the customer and company, alongside a competitive offering. The risk is in the uncertainty of the time it takes to facilitate market penetration and gain share. Additionally, McNeil Labs could react with a reduced price or an incentive based offer for Tylenol. If this was to induce a price-war, the end would be more detrimental to Bristol-Myers than to McNeil Labs, given the difference in costs, in particular that of advertising. Penetration pricing Sales volumes are in general inversely proportional to price. Lowering price as Datril did in the test markets resulted in it capturing almost half of the acetaminophen market. Furthermore, margin per unit1 revenue (see Exhibit 2) at a retail price of $1.85 and a trade price of $1.05 was still positive, with only the introductory deal to the retailers of $0.70 being at a cost-plus price level. This approach too checks all the boxes, as it brings customer value in the form of lower price, a competitive advantage as reflected in Datrils ability to eat into half of Tylenols market share, and profitable growth to Bristol-Myers with a substantial increase in revenue from sales. But, because this strategy involved an advertising campaign costing $6 million over 6 months, which was developed with the price difference display as the core campaign strength, the danger lay in the move of McNeil Labs pursuant to the action of Bristol-

Unit is a 100-tablet bottle

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Myers. If Tylenol was to match Datrils price, not only would Datril lose its competitive advantage and customer appeal, the campaign would become redundant and if changed, may mean additional capital expenditure and ensuing lower profits. Primary demand switch The market for acetaminophen was growing at a rate of 5:1 to that of aspirin. Studies had shown that the side-effects from acetaminophen use were distinctly less than those from aspirin. Bristol-Myers would have done well to acknowledge this change in consumer consumption pattern and the shifting demand between the 2 analgesic variants. By allocating some of the resources from its aspirin brands towards Datril, it could have managed its capital outlay better. In accepting that the market for aspirin is stagnating while that of acetaminophen is increasing, Bristol-Myers could have employed a campaign strategy targeting the aspirin user. In this scenario, the value for the consumer was in getting a superior product, that for Bristol-Myers was in at least maintaining if not growing, the overall category demand for its portfolio of analgesic drugs, even so that the gain in share of Datril was at the probable expense of a loss in share of Bufferin and Excerdin. By not spending additional, but in stead reducing the campaign expense in the aspirin category and allocating it to acetaminophen, it could provide Datril a lower cost base and a greater edge to compete on price, if necessary. However, since this strategy points towards the entire category, it would also typically benefit all the competing companies in the analgesic market. As a result, all offerings would tend to gain share proportionate to their current market position, with maximum benefits likely for the market leader, being Tylenol.

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Distribution channel extensions Bristol-Myers could supplement Datrils value proposition by adding new distribution modes. Engaging book stores and liquor stores to allocate shelf space for retail purpose, would present customers at these stores the convenience of a one-stopshop. It would give Datril not just competitive advantage but also creative advantage and a first mover benefit. To Bristol-Myers it gives a new, additional revenue stream. As these would just be additional retail options, same price and if applicable, introductory offer towards other retailers would apply.

6. SUMMARY
Being a new entrant competing for space in an incumbents territory means that one has to try harder. In attempting to do more, a media campaign based on promoting similarities to Tylenol, will have little impact other than escalating the advertising bill, while lowering Datrils cost competitiveness. The end must justify the means, but a promotion based on a like for like functionality would not appeal to a Tylenol/ Acetaminophen user. With a price position being easily defendable, the greater value lies in going up the value chain, pursuing the $625 million aspirin market that is seeing a shift to acetaminophen use. As this market grows, Datril could even compete with Tylenol on price by having a regular variant priced lower than Tylenol but with same functionalities, and some upscale extensions like an extended relief or extra strength version, equal to or higher priced than Tylenol. In doing so, it allows Datril to establish itself on a differentiation strategy, alongside a similarity based position.

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APPENDIX

double click to open excel per annum Total Analgesic Market - Aspirin - Acetaminophen
CALC.

$680,000,000 $625,600,000 $54,400,000

CELLS C21*F22 92% C21*F23

Balance = Share of Aspirin Share of Acetaminophen

8%

Nb r of TYLENOL units = (minus) COGS ^

19,087,719

C23/G26 C26*G27 C23-C27

@ @

2.85 per unit 0.40 per unit ^ taken to be 0.40 which is actually just the cost of ingredients; additional costs of packaging (b ottle, b ox, instruction sheets not included)

$7,635,088 $46,764,912 $2,000,000 $44,764,912 $2.35

Gross Profit Margin

(minus) Operating Expense

Advertising * Operating Margin

EBITDA

C29-C31

margin / unit revenues

C33/C26

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Exhibit 2
per annum Total Analgesic Market - Aspirin - Acetaminophen per month (1/12) Total Analgesic Market - Aspirin - Acetaminophen
C . ALC

double click to open excel 50 92% 8% = assumed number of Markets Balance = Share of Aspirin Share of Acetaminophen

$680,000,000 $625,600,000 $54,400,000

C LLS E C 3*F4 C 3*F5

$56,666,667 $52,133,333 $4,533,333

C 3/12 C 8*F4 C 8*F5

*per month (1/12) in 2 markets Total Analgesic Market - Aspirin - Acetaminophen

2 $2,266,667 (C8/F3)*F13 $2,085,333 C 14*F4 $181,333 C 14*F5

= Peoria IL, Albany NY

of the test markets share captured by Total Revenues

= number of DATRIL units (minus) COGS ^

DATRIL
C 16/2 C 21/G 22 C 22*G 23 C 21-C 23

$90,667
49,009

@ @

1.85

per unit

$19,604 $71,063 $40,000 $31,063 $0.63

0.40 per unit ^ taken to be 0.40 which is actually just the cost of ingredients; additional costs of packaging (bottle, box, instruction sheets not included)

Gross Profit Margin

(minus) Operating Expense

Advertising * Operating Margin

EBITDA

* Cost for 1 month in 2 markets, based on 6 mln in 6 months, in 50 markets

C 25-C 27

margin / unit revenues

C 29/C 22

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