Chapter 5: Price (Decisions

and Strategies
Midterm - Pharm 205A
Objectives:
• Discuss the role of pricing towards the early realizations of profits for
the firm. The development of a sound pricing policy or a rational
procedure leading to the attainment of objectives
• Enumerate and discuss the external and internal factors that affect
pricing decisions for pharmaceutical products
• Compare several factors that determine the price of a drug such as
market demand and costs
• Describe the various pricing strategies in the drug industry
Overview:
• The pricing schemes for pharmaceutical products are varied from local
or multinational drug companies, for generics or branded lines, for
ethical or OTC or proprietary drug products, for certain categories of
drugstores, hospital pharmacies, industrial clinics, dispensing
physicians and non-traditional outlets such as groceries and
supermarkets, etc
Overview:
• Drug companies also price their products differently for either the
private or government health entities.
What is Price?
• It is the amount of money charged for a product or service
• More broadly, price is the sum of the values consumers exchange for
the benefits of having or using the product or service
• Price is also defined in many ways as follows:
• The values placed on goods and services
• The amount of money and/or goods needed to acquire some
combination of another good and its accompanying services
• The value expressed in terms of pesos or any other monetary
medium of exchange
What is Price?
• Price is called by many names as commonly used by various practitioners
in the pharmaceutical field such as the following:
• Bids or quotations
• Catalogue or list price
• Retail price
• Wholesale price
• Net price
• Billing price
• Rentals/Allowance
What is Price?
• Bids or Quotations - used in government transactions in hospitals,
industrial firms, and related health agencies
• Catalogue or List Price - as used by drug manufacturers when selling
products to trade outlets
• Retail Price - as used by wholesalers and retailers when selling
products to consumers or end-users
• Wholesale Price - when selling products in bulk quantities
• Net Price - the cost of products inclusive of 10% value-added tax (vat)
and discounts
What is Price?
• Billing Price - refers to the costs of products inclusive of raw materials,
labor, and overhead
• Rentals/Allowance - refers to the amount paid by manufacturers to
trade outlets monthly for product displays either at the point-of-sale,
or preferential shelf spaces, or floor display spaces
Who decides for the price of a drug product?
• Pricing decisions are a collaborative effort, not the responsibility of a
single person:
• (Top) Management (e.g., marketing policy board, CEO, or hospital
chief pharmacists)
• They establish overall strategy
• They answer big-picture questions like: “Are we a premium
brand that commands a high price, or a budget-friendly
alternative?” Or “Is our primary goal to maximize profit this year
or to gain market share for the long term?”
Who decides for the price of a drug product?
• Product Managers
• Responsible for the groundwork like market research, analyze
competitor pricing, calculate costs, and then recommend a specific
price for approval by senior management
• They have the primary responsibility for such tasks as:
• Initiation of price changes
• Price determination
• Formulation of price policies
• Price administration
Who decides for the price of a drug product?
• Specialized Departments (e.g., price review council or pricing
department)
• In large companies, a dedicated Pricing Department or Price
Review Council might exist to ensure consistency and monitor how
pricing strategies are working in the real world
Points to Consider:
• Companies sometimes use aggressive pricing to achieve long-term
goals, even if it means short-term losses
• Companies are practically guessing how the market will react to price
changes such as:
• Possible shifting to substitutes or shifting to competitor’s products
• A price decrease may lead to increased demand
• End-users may eventually stop buying imported drug products after
devaluation
Points to Consider:
• When companies initiate price changes, a guessing game continues as
to how companies will react to the price change such as the following
possibilities:
• They may follow immediately and initiate price changes or
• They may not follow at all or
• They may temporarily delay their pricing moves
• They will wait for others to move first
• Pricing decisions are made based on knowledge of competitor’s
situation
What are the factors influencing PRICE?
• Several factors primarily determine the price of a drug product as follows:
• The Market for the Product
• Market appeal
• Market characteristics
• Elasticity of Market Demand
• Expandability of Market Demand
• Pattern of Income Distribution
• Costs of the Product
• Lower Production Costs
• Higher Selling Costs
• Joint Costs
What are the factors influencing PRICE?
• The Market for The Product:
• For example:
• Market Appeal
• Product XYZ commercially available in the traditional and non traditional markets,
come in granules and powder format; attractive packaging appropriate for
consumer’s preference, at the point-of-sale
• Market Characteristics
• Product XYZ, economically-priced as juice drink fortified with Vitamin C to increase
body resistance against infection
• Elasticity of Market Demand
• Demand for Product XYZ are directly influenced by change in price, e.g., lowering the
price will result to an increase in market demand and increasing prices will mean a
decrease in demand
What are the factors influencing PRICE?
• Expandability of Market Demand
• Can be achieved by implementing sales promotions and advertising
campaigns as shown by the increase in sales and market growth of
Product XYZ
• Repositioned as a therapeutic juice drink, repacked and promoted
through tri-media advertising and made available not only in drug
stores but also in supermarkets and groceries
• Good for children and adults, and appropriate as a health drink for
sports enthusiasts and health active people
What are the factors influencing PRICE?
• Pattern of Income Distribution
• Pricing schemes based on income status such as
• Affluent, elite, high income market segment
• Middle income
• Poverty line or the low income market segement
What are the factors influencing PRICE?
• Costs of the Product:
• Lower Production Cost
• Can be achieved in such factors as economies of scale, better
organizational capability, lower procurement costs of raw materials
component and highly able management
• Higher Selling Cost
• Occurs when initiating massive advertising and personal selling; when
costs of operations increases; when you have to reduce price; when
expanding warehousing facilities and when there is an increase in
transportation costs
What are the factors influencing PRICE?
• Joint Costs
• Where multi products company prorates or allocates costs of
marketing and production
When is pricing a problem to drug
companies?
• When a company sets a price for the first time
• When inevitable circumstances lead a company to consider initiating a
price change
• When direct competitors initiate a price change
• When a drug company produces several drug products that have
interrelated demands and/or costs
What are the goals of pricing?
• After a drug company has selected its target market and positioning,
then its pricing strategy together with the other marketing mix
elements become a crucial factor for success in achieving desired
results
• The overall objectives of pricing can be summarized as follows:
• To maximize current profits
• To maintain or improve target share of market
• To pre-empt or minimize entry of competition in the specified
market segment by setting prices at very low levels
What are the goals of pricing?
• The overall objectives of pricing can be summarized as follows:
• To trigger increased customer traffic into a retail store by way of a
price roll-back or bigger discounts vis-a-vis competition for all or
selected product lines
• To survive in business due to increased overhead costs, excess
capacity, stiff competition, and changing consumer needs and wants
• To attain the highest quality product in the market by setting a high
price to justify the perceived high product quality and high cost of R
and D
What are the goals of pricing?
• To help in the stabilization of price in order to prevent the onset of
price wars by setting prices at competitor’s levels
• To keep the loyalty and support of resellers or to avoid government
intervention
• To help or augment the sales of other drug products in the company’s
line
• To generate additional marketing effort, out of the savings from a
market price skimming strategy
What are the goals of pricing?
• To generate additional marketing effort, out of the savings from a
market price skimming strategy
• To determine what product features would be offered and what
production costs could be incurred with price as a key product
positioning factor that define the product’s market competition and
design
• To develop and implement a consistent and effective marketing
program closely coordinating price decisions with product design,
distribution and promotion decisions, as well as company-wide long
term goals
Pricing Strategies Commonly Used in the Drug
Industry
• Selling below cost
• Selling below competition
• Competitive selling
• Pricing above competition
• Stopping entry of competition
• Psychological pricing strategy
• Promotional pricing strategy
• Geographical pricing strategy
• Freight absorption pricing
Pricing Strategies Commonly Used in the Drug
Industry
• Market skimming pricing strategy
• Market penetration pricing strategy
• Product-bundle pricing strategy
• Discount pricing and allowances strategy
• Discriminatory pricing strategy
• Full cost pricing strategy
• Sealed bid pricing strategy
Pricing Strategies Commonly Used in the Drug
Industry
• Demand-oriented pricing strategy
• Perceived value pricing strategy
• Going-rate pricing
• Break-even pricing strategy
• Cost-plus pricing strategy
• Buyer-oriented pricing strategy
• One price formula strategy
• Price bargaining strategy
Pricing Strategies Commonly Used in the Drug
Industry
• Current revenue pricing strategy
• Target profit pricing strategy
• Costs-oriented pricing strategy
• Market share pricing strategy
• Mark up pricing strategy
Principles in Building a Drug Price Policy
• Price must give enough profit to the firm or drug outlet, which will
keep invested capital and employed labor
• Price should be such an amount which will result in placing at a profit
to the firm by making the largest number of units of production in use
• Price should attract new capital to the industry under normal
conditions
Principles in Building a Drug Price Policy
• Increasing volume should make it possible for the drug manufacturers
either to increase the quality without raising or reducing prices and
without reducing the quality
• Average net profit over a number of years should form the basis for
policy validity instead of the profits for a single year