Tueplo_Medical_Case_Analysis_1

Case Analysis Questions
1. For each of the scenarios, compute the optimal floor price:

a. All regions have the same floor price.
b. Each geographic region has its own floor price.
2. ROI: What is the percentage change in profit, revenue, units sold, and percentage margin
from implementing the optimal price floors in Question 1? (Define margin as % margin =
profit/revenue.)
3. Margin dollars goal: Does the new price meet Tupelo’s goal of a 3 percent increase in
gross margin dollars (i.e., 3 percent increase in gross profit)?
4. Tupelo could also segment accounts by account size (small, medium, large) or by
customer class (hospital, plastic surgeon, etc.). Briefly explain why this type of
segmentation is expected to be less profitable than geographic segmentation. If you have
time, you can also determine an optimal floor price for these alternative segments
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MKT 4352: Sales Forecasting, Analytics & Data Driven Sales Strategies
Tupelo Medical: Managing Price Erosion

Case Analysis
Dr. Atul Parvatiyar
1
The Price Floor
• The optimal price floor for “All Regions” is shown below:
ALL REGIONS
New Floor Price $79.66
Cost per Unit $68.00
All Regions Solution Current % Change Absolute Change

Expected Profit $11,963,341 $11,867,857 0.8% $95,484
Expected Quantity 560,765 566,910 -1.1% (6,145)
Expected Revenue $50,095,358 $50,417,737 -0.6% $(322,379)
Margin 23.9% 23.5% 1.5% 0.3%
• The optimal price floor is $79.66, but profit (gross margin dollars) only increases by 0.8 percent.
If one looks at the “Price Distribution Chart” worksheet in the spreadsheet, it is clear that very
few transactions are affected by this new floor. Hence, there is little change in profit
• So, why this is happening. It is important to develop some intuitions for both what and why
• There is a substantial amount of business at $75 to $77, and these customers are on average
only willing to pay $81 (we see this from the “All Regions” worksheet). At the optimal floor, we
have a 0.81 probability of keeping these customers. Setting a higher floor price will lower the
probability dramatically; the margin/volume tradeoff is extreme. At a floor of $85 (just $5
more), we lose nearly all buyers who pay $75 to $77; their probability of retention dips to 0.02
Case Synopsis & Central Issue
• The case describes the challenges of pricing manager Robert Davidson, whose company,
Tupelo Medical, sells medical products through an external sales force
• Recently, the company has experienced both lower average price and more variability in price
for the company’s top- selling blood pressure monitoring system
• Davidson must craft a new pricing policy to address these problems and meet his growth
objective of a 3 percent gain in gross margin dollars
• Davidson collects months of data containing transactions and customer characteristics, such as
size and industry, to study the situation more closely
• He engages a consulting firm, PROS, to build a pricing model with this data so that he can
quantitatively assess the situation. In particular, Davidson’s model allows him to assess the
costs and benefits of implementing a price floor
• With the model in hand, Davidson must now decide on the appropriate pricing policy
• Central Issue: Evaluate the pricing strategy
• New Concepts:
– Win Rate
– Win Rate Elasticity
Other Segments – Segmentation by Customer Size
• Segmentation by customer size is shown below. The key from this calculation is that
profit (gross margin dollars) only increases by 0.8 percent, which is less than the 3
percent goal. Further, this answer is nearly identical to the “All Regions” solution.
Variable Name CUSTOMER_SIZE CUSTOMER_SIZE CUSTOMER_SIZE

Segment Name Small Medium Large Total
New Floor Price $81.04 $80.46 $79.60
Cost per Unit $68.00 $68.00 $68.00
Expected Profit $5,629,119 $1,668,505 $4,667,730 $11,965,354
Expected Quantity 242,159 80,516 235,326 558,001
Expected Revenue $22,095,952 $7,143,577 $20,669,906 $49,909,434
Expected % Margin 25.5% 23.4% 22.6% 24.0%
Current Profit $5,606,250 $1,654,734 $4,606,873 $11,867,857
Current Quantity 245,349 82,438 239,123 566,910
Current Revenue $22,289,982 $7,260,518 $20,867,237 $50,417,737
Current % Margin 25.2% 22.8% 22.1% 23.5%
Change in Profit $22,869 $13,771 $60,857 $97,496
Change in Quantity $(3,190) $(1,922) $(3,797) $(8,909)
Change in Revenue $(194,030) $(116,941) $(197,331) $(508,303)
Change in Margin 0.3% 0.6% 0.5% 0.4%
% Change in Profit 0.4% 0.8% 1.3% 0.8%
% Change in Quantity -1.3% -2.3% -1.6% -1.6%
% Change in Revenue -0.9% -1.6% -0.9% -1.0%
% Change in Margin 1.3% 2.5% 2.3% 1.8%
Segment by Region – Data Analysis
Region/Segment South Region North Region West Region All Regions

New Floor Price $79.57 $87.46 $93.81
Cost per Unit $68.00 $68.00 $68.00
Expected Profit $4,332,649 $2,492,713 $5,468,983 $12,294,345
Expected % Margin 19.7% 26.0% 30.1% 24.7%
Current Profit $4,243,229 $2,387,458 $5,237,170 $11,867,857
Current Revenue $22,301,309 $9,654,550 $18,461,878 $50,417,737
Current % Margin 19.0% 24.7% 28.4% 23.5%
Change in Profit $89,420 $105,254 $231,813 $426,488
Change in Margin 0.7% 1.3% 1.7% 1.2%
% Change in Profit 2.1% 4.4% 4.4% 3.6%
% Change in Margin 3.6% 5.1% 6.0% 5.0%
Implementation & Conclusion
• The geographic segmentation assumes that Tupelo can build “pricing fences” by geography
• But, how do you respond when a customer from California wants the same price as a
customer in Texas?
• How do you respond when a customer has a national account and pricing is regional? These
are real problems that firms face all the time.
• The segmentation by geography is in some sense harder to defend than size segmentation,
which can be justified based on volume; larger customers have greater volume and hence a
lower acceptable minimum price. Similar, specialty outlets like plastic surgery are harder to
call on and it may be easier to justify differential pricing by customer class.
• The best-in-class firms balance margin versus volume with a blend of analytics and intuition,
not just pure gut feel
Powered by TCPDF (www.tcpdf.org)
Other Segments – Segmentation by Customer Class

• Segmentation by customer class is shown below. The key from this calculation is that total gross margin
(profit) only increases by 1.3 percent, which is less than the 3 percent goal. There are greater gains from
implementing the floor among cosmetic surgeons, 4.1 percent.
Variable Name CUSTOMER_CLASS CUSTOMER_CLASS CUSTOMER_CLASS CUSTOMER_CLASS
Segment Name Cosmetic Surgeon Physician Medium Hospital Large Hospital
New Floor Price $93.72 $79.58 $79.72 $79.60
Cost per Unit $68.00 $68.00 $68.00
Expected Profit $2,775,952 $2,956,023 $1,668,512 $4,667,730
Expected % Margin 30.1% 22.9% 23.2% 22.6%
Current Profit $2,667,666 $2,938,584 $1,654,734 $4,606,873
Current Revenue $9,344,654 $12,945,328 $7,260,518 $20,867,237
Current % Margin 28.5% 22.7% 22.8% 22.1%
Change in Profit $108,287 $17,439 $13,778 $60,857
Change in Margin 1.6% 0.2% 0.4% 0.5%
% Change in Profit 4.1% 0.6% 0.8% 1.3%
% Change in Margin 5.6% 1.1% 1.7% 2.3%
• Why is geography a better method of segmentation? This leads to a question on what factors one is
looking for in the data. Much of what we are looking for is variation in WTP among segments.
• When you segment by region, there is tremendous variation in WTP. (Average WTP of North is $99.39;
South is $89.52; West is $106.28; and for Total is $97.33)
• When you segment the other dimensions (class and size), however, there is much less variability in WTP.
This is a key to understanding why the regional segmentation is more profitable.
• This is not the only factor, but is a key take away from the case. When WTP is more similar, segmented
pricing is less valuable.

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Case Analysis Questions

1. For each of the scenarios, compute the optimal floor price:

Tupelo Medical: Managing Price Erosion

Dr. Atul Parvatiyar

• The optimal price floor for “All Regions” is shown below:

All Regions Solution Current % Change Absolute Change

Case Synopsis & Central Issue

Variable Name CUSTOMER_SIZE CUSTOMER_SIZE CUSTOMER_SIZE

Segment by Region – Data Analysis

Region/Segment South Region North Region West Region All Regions

Other Segments – Segmentation by Customer Class

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