Chapter 12Pricing Pharmacist ServicesChapter 12Pricing Pharmacist Services

Based on Carroll, N.V., “Pricing Pharmaceutical Products and Services,” in Financial Management for Pharmacists: A Decision-Making Approach, Third Edition,” Baltimore: Lippincott Williams and Wilkins; 2007.

Norman V. Carroll, PhD

Professor of Pharmacy Administration

Virginia Commonwealth University School of Pharmacy

Chapter 12 slides for

Marketing for Pharmacists, 2nd edition

Learning ObjectivesLearning Objectives

• Explain why pricing is an important part of marketing pharmacy products and services.

• Discuss how pricing relates to other elements of the marketing mix.

• List and discuss the effects of consumer-related factors, competition, pharmacy objectives, and costs on pricing decisions.

• Calculate the cost of providing a pharmacist service.

Learning Objectives (continued)Learning Objectives (continued)

• Explain the relationships among price, cost, and demand for a pharmacist service.

• List and explain the steps involved in one strategy for pricing pharmacist services.

• List and explain methods of presenting service prices to consumers.

PRICE = INGREDIENT COST + SERVICE COST + PROFIT

DISPENSING FEE

Components of price

Components of price

Measures of Rx ingredient costMeasures of Rx ingredient cost

AAC -- Actual acquisition cost

AWP -- Average wholesale price

(it’s really not)

EAC -- Estimated acquisition cost

MAC -- Maximum allowable cost

-- multisource / generics

AMP -- Average manufacturer’s price

Average per Rx profitAverage per Rx profit

• Based on required return on assets

• Ex: $100,000 in Rx-related assets

12% required ROA

60,000 Rxs per year

ROA = Net income / Assets

NI = 12% x $100,000 = $12,000

NI / Rx = $12,000/ 60,000 = $0.20

PricingPricing

• Focus on value – what is product or service worth to consumer

• Value depends on– Consumer perceptions

– How well service is provided

– How convenient service is

– How well benefits are explained

• Value depends on all elements of marketing mix.

PricingPricing

• Consider value to consumer

• Set price to provide value

• Cost affects pricing primarily as it affects value

• Noncost factors equally important

DemandDemand

• Quantity that consumers will buy at a given price

• Different from need

• Can be affected by marketing mix

• Is a function of price

Demand CurvesDemand Curves

inelastic

elastic

Price Elasticity of DemandPrice Elasticity of Demand

• % by which quantity demanded changes when there is a 1% change in price

• Elastic – greater than 1% change in quantity

• Inelastic – less than 1% change in quantity

• Price elasticity of demand = consumer sensitivity to price

Consumers more sensitive to price when Consumers more sensitive to price when

• Cost of product is large part of total cost

• Minimal differences among products

- Consumer can judge quality

- Comparisons are easy to make

• Switching costs are small

CompetitionCompetition

• Prices must be in line

• Distinct advantage

• That consumer recognizes

and values

• Reference prices

Pharmacy ImagePharmacy Image

• Price consistent with image

• Consumers choose based on perceptions

Price as a Signal of QualityPrice as a Signal of Quality

• High price = high quality

• When hard to judge quality

• When quality is variable and risk high

Pharmacy GoalsPharmacy Goals

• Maximize long-run profit

• Increase sales or market share – penetration pricing

• Increase sales of other products – loss leader pricing

• Attract only customers willing to pay for better service – price skimming

• Maintain status quo – match competitors’ prices

Nonmonetary CostsNonmonetary Costs

• Time costs

• Search costs

• Psychic costs

Demand Backward PricingDemand Backward Pricing

3rd party payers cover 85+% of Rxs.

3rd party payers set prices.

Pharmacy’s goal is to profitably provide services at given price.

Suggested Pricing StrategySuggested Pricing Strategy

1. Estimate demand

2. Calculate full service cost (SC)

3. Determine avg. net income (NI) – consider goals

4. Set price = SC + avg. NI + product cost

5. Compare demand and price – re-evaluate if necessary

6. Consider competitors’ responses

7. Implement price

8. Monitor patient and competitor response

9. Re-evaluate price periodically

Estimated Demand for Diabetic Counseling

Estimated Demand for Diabetic Counseling

PricePrice Quantity DemandedQuantity Demanded

$20 1,000

$25 750

$35 500

$45 250

Service Cost for Diabetic Counseling

Service Cost for Diabetic Counseling

Volume Volume Service CostService Cost

1,000 $25

750 $33

500 $49

250 $98

Estimate Net IncomeEstimate Net Income

• $15,000 in assets for DCC• Want a 12% ROA• $15,000 x 0.12 = $1,800• Need $1,800 in annual profit to get

12% return• At volume of 500 sessions,

average profit = 1,800/500 = $3.60• Assumes goal of long-run profit

Set Price Set Price

Volume Volume SCSC Avg. NIAvg. NI PCPC PricePrice

1,000 $25 1.80 0 $26.80

750 $33 2.40 0 $35.40

500 $49 3.60 0 $52.60

250 $98 7.20 0 105.20

Compare Compare

Volume Volume PricePrice DemandDemand

AssumedAssumed at that priceat that price

1,000 $26.80 < 750

750 $35.40 500

500 $52.60 < 250

250 105.20 << 250

Re-evaluateRe-evaluate

• Problem: prices will not generate enough demand

• Solutions

– Cut costs

– Increase demand

– Do not offer service

Pricing StrategyPricing Strategy

1. Consider competitors’ responses – re-evaluate as needed

2. Implement price

3. Monitor patient and competitor response – re-evaluate as needed

4. Re-evaluate price periodically

Pricing StrategyPricing Strategy

• Set profit margins based on product demand

• Focuses on consumer perceptions

1. Market priced – charge low margin

- 10-25 Rxs / 30% volume

2. Staple – charge avg. margin

- 75 Rx products / 25% volume

3.Premium – charge high margin

- the rest of products

Pricing StrategyPricing Strategy

• Consistent with focus on ROA

• ROA = NI/Sales x Sales/Assets

• NI/Sales measures profit per unit

• Sales/assets measures turnover or speed of sales

• So, you increase return by ?