Analyzing Marketing Strategies: Medi-Cult, Pono, and Amazon Fire Phone

This assignment presents a comprehensive marketing case study, examining three distinct scenarios: Medi-Cult's in vitro maturation (IVM) product, Pono's high-end music service, and Amazon's Fire Phone. The first section focuses on Medi-Cult, requiring an economic value analysis of a new medium for the US market and a pricing recommendation. The second part delves into Pono's music system, asking for advice on consumer reactions, market size estimation, and a prediction of product adoption over time. The final section analyzes Amazon's Fire Phone, prompting an assessment of whether the 'gallery' (critics) or Amazon's Bezos had the correct perspective on the product's potential based on customer lifetime value (CLTV). The assignment requires applying marketing principles, performing calculations where necessary, and making reasoned assumptions to support conclusions, with a focus on understanding consumer behavior, market dynamics, and the financial implications of strategic decisions.

1. Economic Value: Medi-Cult’s IVM
Company Background
In late 1998, Medi-Cult, which is a small Danish firm that competes against much larger firms, was reviewing a
revolutionary development-stage product used in a new procedure called “in vitro maturation” (IVM). So far, 5 births
had occurred using IVM. Medi- Cult currently sold human egg medium products for use in vitro fertilization procedures.
In Vitro Fertilization Cycle
Step 1 - Hormone stimulation requires up to 50 self-administered injections over 30 days. Nausea (50%), over-
stimulation problems (10%) and other rarer, but life-threatening side-effects resulted in 2% of patients being
hospitalized for up to 5 days.
Step 2 – The mature eggs were extracted (aspirated) and matured further in a medium supplied by Medi-Cult (or its
competitors).
Step 3 - After four hours in an incubator, the eggs are fertilized with sperm.
Step 4 - Forty-eight hours later, the embryos are transferred to the uterus. This transfer takes just a few minutes.
Of 345,000 cycles started worldwide in 1997, 25% did not complete all the steps above for various reasons. Of these
completed cycles, 25% resulted in a live birth. About 20% of patients do not repeat uncompleted cycles because of the
side effects of the hormone injections required for each cycle. The US market accounted for approximately 50% of global
cycles, with Europe and the rest of the world at 25% each. Medi-Cult sold its current egg medium at $50 per cycle dose
to fertility clinics. In Table A, this cost is included in the “Cost of Treatment” column. Medi-Cult’s variable costs are about
30% of selling price.
Table A: Cost for IVF Cycle
**: In IVF, the patient usually buys hormones directly from a pharmacy while the rest of the items (IVF treatment, lab
work, etc.) are billed by the clinic to the patient or third party payer.
***: Miscellaneous costs include additional doctor visits, ultrasound monitoring, and hospitalization.
In Vitro Maturation
Medi-Cult’s new medium eliminated the need for the hormone injections. In the IVM procedure, immature eggs were
aspirated and matured for two days in a medium consisting of a mixture of the traditional hormone medium and Medi-
Cult’s newly patented medium. The eggs were then fertilized and transferred into the patient, as with the existing IVF
procedure. Medi-cult anticipated that IVM would equal IVF’s cycle loss rate and live birth rate per competed cycle. Since
IVM eliminates the hormonal stimulation step from the IVF procedure, the cost of hormones for the patients falls to
zero. Furthermore, lab work and miscellaneous costs fall by about 50%.
Table B: Cost for IVM Cycle
Cost of Treatment (a)
Cost of Injected Hormones**
(b)
Lab Work (c ) Misc Cost*** (d) Total (a+b+c+d)
US $4K-$6K $3000 $500 $500 $8K-$10K
Non-
US $2K-$3K $1500 $300 $200 $4K-$5K

2
Cost of Treatment**
(a)
Cost of Injected Hormones
(b)
Lab Work (c) Misc. Costs
(d) Total Cost (a+b+c+d)
US $4K-$6K 0 $250 $250 $4.5K-6.5K
Non-
US $2K-$3K 0 $150 $100 $2.25K-$3.25K
**: These costs include reflect the various steps of IVF that would still have to be performed, such as doctor visits and
tests. They do not include the price of the IVM medium.
1a) Calculate the Economic Value of a single cycle dose of the new medium for the US market. (22 points)
1b) What price would you recommend? (15 points)
3
2. New Product Adoption: Pono’s Music System
Pono is a new-to-the-world, high-end music service that is going to be launched by the musician Neil Young. It got a lot
of coverage in recent media, as shown by the Guardian clip below. Neil Young, the musician, is a famously belligerent
audiophile, lambasting what he sees as inferior sound quality on MP3s. His imminent Pono system combines high-end
portable music players (i.e., the Pono Player) with a new download service (i.e., the Pono service via a website) that will
sell albums at far greater sound quality than iTunes. To use a crude analogy, if a 256kbps MP3 is an easyJet flight (cheap,
convenient), then Pono's 24-bit files are a trip on Singapore Airlines, Suites or First Class!
Given this background, please help Pono with the following decisions:
2a) First, Pono needs some help in anticipating potential consumer reactions. How would you advise Neil Young and the
managers at Pono to prepare for the reception of their product in the market? Do you think people/consumers are likely
to give Pono a warm reception and make it a runaway success? Why? Please explain clearly. (22 points)
2b) Second, Pono needs some help estimating the market size. How would you go about estimating the (rough) potential
market size/demand for their product? First, please lay down the steps involved in your suggested estimation process.
Then, along with each step indicate your estimates. You’re welcome to make assumptions based on the data provided in
the Appendix or from the lecture notes, but please do state what those assumptions are as you provide your answer. (23
points)
4
2c) Third, the managers at Pono would like to figure out how Pono will be adopted over time. How would you go about
predicting the adoption of Pono? Please clearly explain all the steps you would take in order to make a prediction (and
provide a rough graph). You’re welcome to make assumptions based on the data provided in the Appendix or from the
lecture notes and materials, but please do state what those assumptions are as you provide your answer. (23 points)
5
3. Customer Life Time Value: Amazon’s Fire Phone
Amazon was in the news a few years ago with the release of its new smartphone nicknamed “Fire.” The press coverage,
albeit extensive, was extensive and often critical, as captured by the June 18, 2014, newspaper clipping below.

The New York Times’ technology columnist, Farhad Manjoo (featured above), was fairly critical of the phone and his
article’s headline “Amazon Fire Phone’s Missed Opportunities” says it all (he thinks the price is too high and that some of
the product features are too gimmicky).
Another analyst said, “I have yet to see how these [Fire phone and other recent ventures] investments are producing
any profit. They’re probably more of a distraction than anything else.” (Safa Rashtchy, Piper Jaffray analyst)
And there were many other such critical pieces and comments.
Bezos had a pithy response to the gallery, “We’re very comfortable being misunderstood. We’ve had lots of practice.”
3. Based on our session on Customer Lifetime Value, please comment on the two positions – who is likely to be correct
in their assessment of the new Fire phone, the “gallery” (i.e., tech- columnists, analysts, etc.) or Amazon’s Amazin’
Bezos? (45 Points)
In order to make up your mind please look at the information provided below and some additional information provided
in the Appendix. To begin, let us look at some information regarding the Fire phone (e.g., product, price, etc.):
  Product Features: Look-and-feel of a good smartphone (e.g., iPhone 5), Firefly feature
(allows user to point at any product and the phone can tell whether that product is being sold on Amazon; also
allows one-click ordering), 3-D images on phone user interface (e.g., allows user to scroll or browse through
content by tilting the phone in certain ways), and camera phone storage (every picture taken with the phone
camera can be stored online; no limit)
  Accompanying Services & Special Deals: Mayday (live customer service with a one button “hotline” call); and
Amazon is also providing 1-year of free Amazon Prime membership.
6
 Contract Details: The phone is available for $200 (paid upfront) with a 2-year contract with AT&T. The cheapest
available plan that goes along with this 2-year contract is $70/month (= $50/month for a 1GB data plan + $20/month for
the Fire phone). The AT&T contract has no direct implication for Amazon, other than the fact that these numbers show
that the true/full price of the Fire phone is about $680 ($200 upfront + $20/month x 24 months = $680).
Again, please be sure to look at the Appendix for some useful information regarding patterns of consumer behavior.
Once you have looked at both the information provided above and the Appendix, please weigh in with your opinion.
Note: Please note the following guidelines—read them before you start answering the question—this question has many
moving parts and this rough guideline provides a systematic approach to answering it.
  While there are many ways to approach this question, at first, please write down all the
factors that should be taken into consideration. Bullet points will suffice.
  Next, along with the bullet points, also provide a brief description of the “direction” of
the effect—that is, is the factor likely to affect Amazon positively or negatively? How so?
If possible, use the facts and data provided to support your answer.
  Only then proceed to synthesize everything together to inform your final verdict.

Note that calculations are helpful in answering this question, but of necessity, you will need to make
assumptions to perform those calculations, and it is important you justify those assumptions. Also note that, for
real-world business decisions, there are two kinds of calculations possible – “one-off” calculations done in order
to illustrate the effect of individual factors in isolation, and “integrative” calculations that look at the joint effect
of all the factors taken together. Please concentrate on the first kind. Please do not attempt the latter kind, or at
least limit yourself to considering just a few (say 2) variables at a time, as the latter kind of calculations require a
spreadsheet model to be implemented, which is outside the scope of this exam. You’re of course allowed to use
spreadsheets for calculations just like you’re allowed to use a calculator for calculations. Please do not spend too
much time on the minutiae of the calculations. Follow the three bullet points above and keep things simple.
Remember, the key objective is to answer the big question—is Amazon’s Fire phone, as it is currently sold, a
good idea or a bad idea?
7
APPENDIX (MISCELLANEOUS DATA SHEET)
  US MP3 sales = 18 Million units
  Results of a Forrester Group survey asking people, “How interested would you be in a
very high quality music service which is significantly better than exiting options like iTunes and Spotify?”
indicated the following levels of interest: definitely purchase = 30%, probably purchase = 20%, not sure = 30%,
probably not purchase = 10%, definitely not purchase = 10%
  Accenture published the following sample product launch statistics:
New Product Category p (Coefficient of
Innovation)
q (Coefficient of
imitation)
M (Market
Potential)
Artificial insemination 0.014 0.437 6,000,000
ATM machines 0.0081 0.197 2,200,000
Cassette deck 0.01253 0.2272 8,000,000
CD player 0.02836 0.368 20,000,000
Coffee maker ADC (Automatic Drip Coffee) 0.077 1.106 44,000,000
Phone banking 0.0143 0.88378 8,000,000
Recording media (e.g., records, cassette tapes,
CDs) 0.00874 0.32847 50,000,000+
  According to a study by CIA (Consumer Intelligence Agency) of Amazon users, the following statistics were
revealed: Total number of unique Amazon users = 164 million; Total number of Amazon Prime users = 16.7
million; Spending by Amazon user (non- prime) = $650/year; spending by Amazon user (Prime) = $1,340/year
o Note:Amazon’sPrimesubscriptionisafree2-dayshippingservice,whichis currently made available to a member
at a cost of $99/year
  Further the CIA thinks that the gross margin (or contribution) for a Prime customer is 10% while that of a
regular user is higher, at 19% (since Prime customers generate higher shipping costs)
  Customer Churn: Regular Amazon users have a churn rate of approximately 6% per month, which equals to
6% x 12 = 72% lost customers at the end of the year;
  Renewal: Only 25% renew their Prime subscription at the end of the year
  Acquiring Customers: A multifaceted advertising program is required to acquire an
Amazon Prime customer (approx. $125/person); the cost to acquire a regular Amazon

customer is lower (approx. $75/person)
  Effect of Customer Service Best Practices: Technology and analytics implemented CRM
(Customer Relationship Management) best practices tend to halve churn rates (albeit not cheap)
8