Optical Distortion Notes
How much is a pair of ODI lenses worth to the chicken farmer?
Let us consider the benefits to the farmer per bird per year (chicken lays eggs for about a year and
lenses are not reusable). The sources of benefits are:
1. Reduced chicken mortality.
Mortality reduced from 9% to 4.5%
The cost of a chicken:
= $ 2.4
x 4.5% Reduction in mortality
= 10.8 cents
The benefits are most sensitive to the assumption that lenses work to reduce mortality. For
example, if they fall off, mortality may go back not to 9%, but to 25%! (since chickens are not
debeaked). The benefit of reduced mortality then may be negative!
2. Feed savings
Assume that the feed depth is reduced by ½ inch. Some of you might have assumed that the feed
depth is reduced by 1 inch. But note that the data in the case about per 1 inch reduction has
nothing to do with debeaking, so whatever height reduction you used, you must justify (the case
argues for “at least 3/8 inch”).
156/2 [for ½ inch per day] x 1/20,000 [per chicken] x $158/2000 [per lb] x 365 days = 11.25 cents
Note the sensitivity to the reduction of depth and average depth. Note also that the whole
calculation is hypothetical since the data is not on the chickens with lenses vs. debeaked. But the
risk is probably limited and there is no reason to believe that chickens will bill more or eat more.
So, probably more upside potential then downside one.
3. Extra egg production
This could be because of less trauma. Based on one egg increase relative to debeaking per
chicken per annum: 1 egg * 1/12 * $ 0.53 = 4.5 cents. Note that since most costs are not variable
in eggs, one should use revenue per dozen as opposed to average profit per dozen. Some of you
may have assumed that 1 egg is per week (the case is not very clear, although this would
contradict the statement that the egg production retardation is not much).
4. Labor cost of inserting lenses versus that of debeaking.
This can be seen as a wash (220/hr debeaking vs. 225/hr. lenses). But: sensitivity to the
assumption of new labor costs? We know the old cost, but the new estimate of chicken/hour is
from one team only! Might be negative.
Thus the total calculable economic benefit to the chicken farmer over debeaking = 25.75 cents
4. Other benefits/risks:
Some other benefits you might have thought about:
 Humane treatment. But would it be worthwhile to educate consumers? Probably not 
$0 benefit.
 Things that can go wrong – since this is a new product: increased mortality if lenses are
not placed in correctly or have side effects (i.e., eye infections).
5. Switching Costs: - these are mostly “fixed” (not per chicken)





Cost of learning the benefits
Trial and follow-up
Consequences of failure (including psychological)
Consequences of success (would benefits be eroded by adoption by other farmers?)
Who will teach the lens insertion teams (re-educate debeaking crews)? Note that the issue
is different for large firms (re-education) and small firms who outsource labor.
Pricing Policy
Price must be set below value (25.75c/pair) by an amount dependent on 1) risk assessment and 2)
switching costs and price sensitivity.
The higher the estimate of risk, the lower the price; the more price sensitive is the farmer, the
lower the price (according to the case, farmers are price sensitive). At the same time, since the
company does not have resources to go for the whole market (financial constraint), it may be ok
with small market share, i.e., with relatively high price.
Some psychological factors making adoption difficult:
 Reference price (debeaking = $0 taking into account that labor costs are the same)
 Risk: note that value is not bounded from below by $0
 “Crazy idea”
 Expenditure effect (right now farms are close to having no money  no budget)
Since risk/uncertainty is higher at the beginning, makes sense top discount price at the beginning.
But: Note also that promotional price needs to ensure perception of fairness of the subsequent
regular price. For example, free trial, or free labor and quality control (e.g., paying for bird
replacement). Warranty is though difficult due to: 1) if product does not work, company goes
belly up and cannot honor warranty 2) refunding the price paid does not necessarily pay for all
damages.
Variable costs: The variable costs are 3.2 cents for manufacturing. The box costs which are
variable are 0.17 cents (see case footnote 3). Finally, the injection moulds cost $12,000 for 15 m
pieces and can be thought of as variable at 0.08 cents (assuming that introduction is a success) or
fixed otherwise. So the total variable costs are 3.45 cents or close to it.
Note that fixed costs are somewhat relevant to the pricing decision as the finances available are a
constraint. This may be a factor to price higher and concentrate on most likely adopters (since the
salespeople number is a constraint). One may be tempted to price lower and not have much direct
selling, but due to the huge difference of the new method from the old method (debeaking),
promotional effort is very likely needed. Higher price would also help communicate value.
General discussion: What influences new product adoption?






Relative advantage over products it is designed to supersede
Perceived complexity
Compatibility with existing practices
Ease of observing and communicating of features
Degree of risk
Can it be tried on a limited basis?