Tupelo Medical:

Managing Price Erosion

Introduction:

Tupelo Medical Distribution was based in Tupelo, Mississippi, with annual revenues of $350 million.

Its best selling product, the Micron 8, accounted for 15% of total sales in volume and an equal amount in
revenue, being one of the higher-margin products it contributed 22% of the company’s total margin.

Different Markets:

Geographically market is divided in 3 parts:

South: The large business in the South had driven down the prices over the year to between $75 and
$90. This was largely due to a large amount of repeat customers requested and a concentration of small
and medium-sized facilities.

North: Higher concentration of large hospitals (with staffs of 100 to 1000+ physicians). Sales in the North
had a price band ranging from between $87 and $100.

West: here majority of small and medium but specialized firms operated (including the celebrity clinics),
had a price spread between $95 and $105

Situation:

Tupelo Medical was facing a price erosion that had contributed to a steady decline in margins over past
few years.

Report suggest that a lack of price control might have been contributing to the erosion in average prices.
Over the last six months the average sales price for the Micron 8 (their best-selling product) had varied
by plus minus 20 percent.

Task:

Implement new pricing controls that would reduce variability in price and help increase the gross margin
by 3% on its top selling product, the Micron 8 Series Upper Arm Blood Pressure Monitor System.

Action:

Paying a closer look at the sales history and customer profiles it was suspected that some of the lower-
priced sales were driven by the sales force’s need to meet specific volume targets.

It was decided to institute a process that set a lower bound on the offer price, an acceptable minimum
price (AMP) for the product.
It was expected a gain in profit but on the same time some loss in volume was expected. The task was to
balance the margin requirements against the potential volume loss to achieve maximum profits.

To study the problem assistance from PROS (a firm offering profitability management and optimization
software solution) was taken. PROS was able to develop a model that estimated each customer’s
willingness to pay for the Micron 8 Series BPM system.

Results:

From the Data provided in excel sheet:

Using solver we came up with the best possible AMP value

 Taking All Regions together

o AMP = $79.66
o There is a drop in total sales volume by 1.08%
o There is a drop in net revenue by 0.64%
o There is an increase in profit margin by 0.80%
 Taking only South Region:
o AMP= $79.57
o There is a drop in total sales volume by 2.24%
o There is a drop in net revenue by 1.41%
o There is an increase in profit margin by 2.11%
o Expected quantity sold = 259611
 Taking only North Region:
o AMP= $87.46
o There is a drop in total sales volume by 2.31%
o There is a drop in net revenue by 0.65%
o There is an increase in profit margin by 4.41%
o Expected quantity sold = 104397
 Taking only West Region:
o AMP= $93.81
o There is a drop in total sales volume by 3.84%
o There is a drop in net revenue by 1.50%
o There is an increase in profit margin by 4.43%
o Expected quantity sold = 187006

From these results, keeping same AMP won’t be able to raise the profit margin by 3% as maximum profit
attained by keeping same AMP for all regions is 0.80%.

Keeping different AMP for all three regions average increase in profit margin comes out to be 3.33%,
which is above our goal of 3% increase.

Thus we propose that Tupelo should keep an AMP of $79.57 for South region, $87.46 for North region
and $93.81 for West region.