Warner-Lambert Ireland: Niconil

Executive Summary

In early 1990, Warner-Lambert Ireland planned to launch an innovative new product named Niconil, which was made for people who would like to quit smoking. Niconil would be the first patch-type product in the smoking cessation market in Ireland. While existing smoking cessation products of the other companies had not been successful due to the concerns about negative side effects, Warner-Lambert executives had an optimistic view that Niconil would be recognized as a safe and effective product by prospective consumers. In fact, results obtained through preliminary market research seemed to support their optimistic views. Nevertheless, there were critical problems that should be solved before launching the product as follows:

Which pricing strategy would be appropriate for the new product?

What would be the most effective marketing communication strategy for the new product?

Because effective pricing strategy would be directly related to the companies’ actual sales and profits, in this case, two questions raised above will be mainly discussed. Advertising and other marketing strategies, such as public relations and sales promotions, will be examined closely related with the discussion of pricing strategies.

Product Evaluation

Niconil

As known generally, it was nicotine that resulted in addictive behavior to smoking. In other words, stopping smoking reduced the amount of nicotine, and made the smokers desire cigarettes to compensate for nicotine needed for maintaining the level of it. Warner-Lambert’s Niconil was the product focusing on the addictive aspect of smoking. That is, Niconil was a nicotine-replacement product, and could be used as a substitute for cigarettes. Although there had already been another nicotine-replacement product, Niconil would be the first patch-type product in this market. Compared with competitor’s chewing gum type product, Niconil could be recognized safer from negative side effects, because nicotine of this patch type product was released indirectly through skin, not directly through mouth unlike competitor’s chewing gum type product. Although Niconil resulted in some skin irritation, WLI executives regarded this as a minor problem, and thought optimistically that it would be entirely solved in the future. Some results through clinical trials supported the effectiveness of Niconil on helping people quit smoking.

Support Program

Unlike existing smoking cessation products, Warner-Lambert’s Niconil was the first product focusing on both physical and psychological aspects of smoking, because psychological addiction was also critical aspect of smoking behavior though patch product would be helpful for reducing physical symptoms of smoking. To focus on the psychological aspects, WLI executives prepared a program supporting Niconil patch product. While patch product could not be sold directly to consumers without prescription, the support program could be sold to consumers directly without prescription, if they were separately packaged from the patch product.

Moreover, the supporting program could be advertised nationally, while Niconil patch product advertising was restricted in medical magazines. That is, Niconil could build brand awareness effectively using the supporting program. There were two options which WLI executives should make a choice before launching the product. This support program could be sold separately at additional cost or presented free of charge when consumers buying Niconil patch products. In addition, there were two alternatives of distribution of the supporting program. One option was to concentrate on doctors prescribing Niconil, while the other option was to distribute support programs primarily to pharmacies. Of course, WLI executives could use these two options simultaneously.

Before making a decision, it would be extremely important to take cost and benefit of these options into consideration. Development cost of the supporting program was £3000, and a variable cost per unit was £3.50. Because of the limited budget, it should be examined under the consideration of overall pricing and communication strategy.

Market Evaluation

Overall, total population of Ireland was about 3.5 million in 1989, and 0.75 million people (30% of 2.5 million adults) were smokers. That is, the total potential market for smoking cessation products was 0.75 million. WLI executives estimated that those who tried to stop smoking each year were 75,000, and assumed that Niconil could be sold to half of that number. Therefore, target market size would be 37,500 people, and then, WLI expected that 100% of the estimated consumers would purchase Niconil at first time. After that, 60% of the target customers would buy another two-week supply and finally, 25% of that number would purchase a third-week supply. According to results of test trials, about 75% of smokers finished the Niconil program within 6 weeks. If they did not take remaining 25% of smokers into account, the total expected unit sales could be calculated as follows:

1. Total target consumers : 37,500

2. 60% of No. 1 (those who would purchase a second two-week supply) : 22,500

3. 20% of No. 2 (those who would purchase a third two-week supply) : 4,500

Total expected unit sales : 37,500 + 22,500 + 4,500 = 64,500

This number might be regarded as a minimum expected unit sales, because remaining 25% of smokers who did not complete the program in test trials was not included in this calculation. If taking those people into account, the expected unit sales would increase.

Pricing Strategy

WLI executives had two options of pricing. First option was to position Niconil in the same price range as cigarettes. In other words, the expected retail price per unit would be £32.00. On the other hand, second price option was to place Niconil in the premium price range. Under this second option, the expected retail price per unit would be £60.00. Breakeven analysis would be very helpful for examining these two options.

First option

Expected retail price : £32.00

Price before Value Added Tax (Value Added Tax : 25%) : £25.6

Price before Retail markup (Retail markup : 50%) : £12.8(manufacturer price)

Variable cost per unit : £10.8 (=£12.00 – £1.2) under the assumption of purchasing a new machine

Fixed cost (cost of a new Niconil machine) : £1.2 million

Marketing budget : £200,000

Using the figures shown above, breakeven point of Niconil could be calculated like this:

1,200,000(Fixed costs) + 200,000(Marketing costs)

B.P = 700,000 units

12.8(Manufacturer price/unit) – 10.8(Variable costs/unit)

As shown above, 700,000 units should be sold to reach breakeven point, if selecting the first option. This breakeven point was much higher than the expected unit sales of Niconil(64,500 units). Although considering in
selling the support program at higher price, it would be extremely difficult to reduce the breakeven point level to the same level of expected unit sales with this pricing option.

Second option

Expected retail price : £60.00

Price before Value Added Tax (Value Added Tax : 25%) : £48.00

Price before Retail markup (Retail markup : 50%) : £24.00(manufacturer price)

Variable cost per unit : £10.8 (=£12.00 – £1.2) under the assumption of purchasing a new machine

Fixed cost (cost of a new Niconil machine) : £1.2 million

Marketing budget : £200,000

Using these numbers, breakeven point could be calculated as follows:

1,200,000(Fixed costs) + 200,000(Marketing costs)

B.P = 106,060

24.00(Manufacturer price/unit) – 10.8(Variable cost/unit)

As shown above, breakeven point of second option was still higher than expected unit sales, though it was even lower than the first option. To control the breakeven point, it would be inevitable to change price level of Niconil. In terms of cost and benefit, support programs could not be presented free of charge. Support programs should also be sold at additional costs higher than the highest mean price (£8.50) proposed in pricing study in 1989, and patch product should also be priced at much higher level than second option suggested.

If they presented support programs free of charge, the price of patch products would go up beyond the normal level. Accordingly, a new alternative of pricing should be suggested to reach reasonable breakeven point. In fact, actual sales of Niconil would heavily depend on advertising and other marketing activities. Effective communication strategy corresponding with pricing strategy would be one of the most important variables, and very helpful for increasing sales, and thus it would be reasonable to examine advertising and other communication strategy with regard to pricing.

Communication Evaluation

Basically, WLI marketing communication strategy focused on positioning Niconil as a unique program which covered both physical dimension and psychological dimension of addictive smoking behavior. In addition, they tried to promote Niconil patch as a safer product than competitor’s Nicorette chewing gum, in terms of negative side effects. Total marketing budget was £200,000. Unfortunately, direct advertising of prescription product to consumers was prohibited by Irish regulations. As a result, Niconil advertising could not be reached to target consumers directly, but to doctors and pharmacies indirectly through medical magazines. Because of this, they allocated only 16% of the total marketing budget to advertising, while 42% of marketing budget to promotion.

However, support programs could be advertised and sold directly to consumers unlike patch products. National advertising of support programs might enable them to build brand awareness of Niconil, and this branding might exerted positive influences on the sales of patch products. In addition, WLI also took into consideration a direct mail campaign targeting 2,000 GPs in Ireland, and a variety of public relations campaign. These marketing activities combined with aggressive advertising campaign might enable to establish Niconil’s position effectively in consumers’ mind. Moreover, it might represent an opportunity that Nicorette, the major competitor of Niconil, had not been advertised for three years.

Accordingly, WLI also had two options of marketing budget allocations, and these options were closely associated with two options of pricing strategy. First option would be to focus on advertising and allocate largest amount of budget to advertising. This option would be useful when WLI targeting current large segment(37,500) of the market, and pricing Niconil at higher price. Second option would be to concentrate on promotion and personal sales. It would be useful when WLI redefining target market as a much smaller one.

Alternatives and Suggestion

At this point, WLI had two strategically important alternatives combining pricing and communication strategies. First alternative was to position Niconil in premium price category, as exemplified above, and to allocate the largest portion of marketing budget to advertising. Second alternative was to redefine target market as a much smaller one. If they adopted this alternative, a new Niconil machine would not be necessary, and the cost of a new machine could be distracted from fixed costs. With the second alternative, they might concentrate on promotional activities to boost short-term benefits.

Alternative 1

If they priced Niconil patch product at £80.00, and support program at £10.00, it would be possible to reach to reasonable breakeven point.

Expected retail price : £80.00(patch), £10.00(supporting program)

Price before Value Added Tax (Value Added Tax : 25%) : £64.00(patch), £8.00(supporting program)

Price before Retail markup (Retail markup : 50%) : £32.00(manufacturer price of patch), £4.00(supporting program)

Variable cost per unit : £10.8 (=£12.00 – £1.2) under the assumption of
purchasing a new machine + £3.50(supporting program)

Fixed cost (cost of a new Niconil machine) : £1.2 million + £3,000

Marketing budget : £200,000

According to these modified numbers, new breakeven point could be calculated like this:

1,200,000 + 3,000 + 200,000

B.P = 64,654

36.00(patch + support program) – 14.3(patch + support program)

Pro : WLI should sell 64,654 units of Niconil to reach breakeven point, and this figure was slightly lower than the expected unit sales of Niconil. Aggressive advertising and other marketing activities might enable to boost sales of Niconil, though the unit retail price of Niconil was much more expensive than those of competitors’ products. In addition, WLI could also extend their business to other European countries based on a new Niconil machine which could produce 14,000 units per month.

Con : There were still important factors which should be considered seriously. For instance, people might be reluctant to pay high price like £80.00 for purchasing Niconil. In other words, the unit retail price of Niconil might be much more expensive than competitors’ product prices. That is, if they adopted this alternative, Niconil might lose its price competitiveness, and then WLI would not be able to reach their sales goal. Although WLI allocated the largest amount of marketing budget to advertising, they could not assure whether their marketing strategy would boost actual sales.

Alternative 2

If WLI redefined their target market as a much smaller segment that existing production capacity could support, the £1.2 million for purchasing a new machine could be distracted from total fixed costs. Based on adopting this alternative, marketing budget could be reduced to the considerable extent, because WLI should concentrate on personal sales and promotions rather than on advertising and public relations. If WLI priced Niconil at £60.00 based on a new target market, pricing data would be modified as follows

1. Total target consumers : 8,000

2. 60% of No. 1 (those who would purchase a second two-week supply) : 4,800

3. 20% of No. 2 ( those who would purchase a third two-week supply) : 960

Total expected unit sales : 8,000 + 4,800 + 960 = 13,760

Expected retail price : £60.00(patch)

Price before Value Added Tax (Value Added Tax : 25%) : £48.00

Price before Retail markup (Retail markup : 50%) : £24.00

Variable cost per unit : £12.00 under the assumption of not purchasing a new machine

Fixed cost (cost of a new Niconil machine) : £3,000

Marketing budget : £100,000

3,000 + 100,000

B.P = 8,583 units

24.00(Maufacturer price/unit) – 12.00(Variable cost/unit)

Pro : As shown above, breakeven point calculated was much smaller than total expected unit sales. Compared with alternative 1, breakeven point seemed to be relatively easy to reach. Because total expected unit sales would be much higher than breakeven point, considerable profits might be easily obtained. Moreover, support program could be presented to consumers free of charge, and this free support program would be effective on inducing consumers to purchase Niconil. If WLI intended to get short-term profits in Irish market, alternative 2 would be more reliable choice than alternative 1.

Con : It seemed difficult to get long-term profits if adopting alternative 2. Market size was too small, and consumers would not purchase Niconil repetitively unlike cigarettes. According to results from test trials, 75% of consumers would complete Niconil program within 6 weeks. This reflected that potential consumers might decrease dramatically after certain period of time. After getting short-term profits, WLI’s business might come to an end.

Final Suggestion

Although WLI could not assure whether consumers willingly purchased Niconil at such an expensive price as £80.00, alternative 1 seemed to be a more reasonable choice than alternative 2 in terms of huge potential market of Western Europe. WLI assumed that estimated unit sales in Western Europe would increase as much as 25,000 units per year. This estimation indicated huge potentials in Western Europe market, and WLI could export some of its products to the Western Europe market. As a result, their business would be extended to the considerable extent. In addition, dynamic advertising campaign and other marketing activities would establish brand awareness of Niconil firmly, and favorable image of the company would be very helpful for not only maintaining and expanding Niconil market but also WLI’s existing and future business in Ireland.