Copyright © 2001 McGraw-Hill Ryerson Limited Lecture 4 Pricing policies of pharmaceutical companies

Copyright © 2001 McGraw-Hill Ryerson Limited

Lecture 4

Pricing policies of pharmaceutical

companies

Copyright © 2001 McGraw-Hill Ryerson Limited14 - 2

Pricing Strategy• how does a company decide what price

to charge for its products and services?• what is “the price” anyway? doesn’t

price vary across situations and over time?

• some firms have to decide what to charge different customers and in different situations

• they must decide whether discounts are to be offered, to whom, when, and for what reason


Price vs. NonpriceCompetition• In price competition,price competition, a seller regularly

offers products priced as low as possible and accompanied by a minimum of services.

• In nonprice competitionnonprice competition, a seller has stable prices and stresses other aspects of marketing.

• With value pricingvalue pricing, firms strive for more benefits at lower costs to consumer.

• With relationship pricing,relationship pricing, customers have incentives to be loyal-- get price incentive if you do more business with one firm.


Nonprice Competition• some firms feel price is the main

competitive tool, that customers always want low prices

• other firms are looking for ways to add value, thereby being able to avoid low prices

• sometimes prices have to be changed in response to competitive actions

• many firms would prefer to engage in nonprice competitionnonprice competition by building brand equity and relationships with customers


Relationship Pricing

• Uses price as a method to build long-term relationships with the best customers

• Focuses on giving better deals to better customers

• Goal is to price relative to the value of the customer to the firm, while building loyalty and stimulating repeat buying


The Price Determination Process• In pricing, an organization first must decide on

its pricing goal.• The next step is to set the base price for a

product.• The final step involves designing pricing

strategies that are compatible with the rest of the marketing mix.

• Many strategic questions must be answered:• Will our company compete on the basis of

price or other factors?• What kind of discount schedule (if any) should

be adopted?


SELECT PRICING OBJECTIVE

SELECT METHOD OF DETERMINING THE BASE PRICE:

Cost-pluspricing

Price based onboth demandand costs

Price set inrelation tomarket alone

DESIGN APPROPRIATE STRATEGIES:

Price vs. nonprice competitionSkimming vs. penetrationDiscounts and allowances

Freight paymentsOne price vs. flexible pricePsychological pricing

Leader pricingEveryday low vs. high-low pricingResale price maintenance

The Process: An Illustration


Pricing Strategies


Penetration Pricing


Penetration pricing strategy: involves the use of a relatively low entry price as compared with competitive offerings; based on the theory that this initial low price will help secure market acceptance

• Price set to ‘penetrate the market’• ‘Low’ price to secure high volumes• Typical in mass market products –

chocolate bars, food stuffs, household goods, etc.

• Suitable for products with long anticipated life cycles

• May be useful if launching into a new market

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Market Skimming


Market Skimming

• High price, Low volumes• Skim the profit from the

market• Suitable for products that

have short life cycles or which will face competition at some point in the future (e.g. after a patent runs out)

• Examples include: Playstation, jewellery, digital technology, new DVDs, etc.

Many are predicting a fire sale in laptops as supply exceeds demand.Copyright: iStock.com


Value Pricing


Value Pricing

• Price set in accordance with customer perceptions about the value of the product/service

• Examples include status products/exclusive products

Companies may be able to set prices according to perceived value.

Copyright: iStock.com


Loss Leader


Loss Leader

• Goods/services deliberately sold below cost to encourage sales elsewhere

• Typical in supermarkets, e.g. at Christmas, selling bottles of gin at £3 in the hope that people will be attracted to the store and buy other things

• Purchases of other items more than covers ‘loss’ on item sold

• e.g. ‘Free’ mobile phone when taking on contract package


Psychological Pricing


Psychological Pricing

• Used to play on consumer perceptions

• Classic example - £9.99 instead of £10.99!

• Links with value pricing – high value goods priced according to what consumers THINK should be the price


Going Rate (Price Leadership)


Going Rate (Price Leadership)

• In case of price leader, rivals have difficulty in competing on price – too high and they lose market share, too low and the price leader would match price and force smaller rival out of market

• May follow pricing leads of rivals especially where those rivals have a clear dominance of market share

• Where competition is limited, ‘going rate’ pricing may be applicable – banks, petrol, supermarkets, electrical goods – find very similar prices in all outlets


Tender Pricing


Tender Pricing

• Many contracts awarded on a tender basis

• Firm (or firms) submit their price for carrying out the work

• Purchaser then chooses which represents best value

• Mostly done in secret


Price Discrimination


Price Discrimination

• Charging a different price for the same good/service in different markets

• Requires each market to be impenetrable

• Requires different price elasticity of demand in each market

Prices for rail travel differ for the same journey at different times of the day

Copyright: iStock.com


Destroyer Pricing/Predatory Pricing


Destroyer/Predatory Pricing

• Deliberate price cutting or offer of ‘free gifts/products’ to force rivals (normally smaller and weaker) out of business or prevent new entrants

• Anti-competitive and illegal if it can be proved


Absorption/Full Cost Pricing


Absorption/Full Cost Pricing

• Full Cost Pricing – attempting to set price to cover both fixed and variable costs

• Absorption Cost Pricing – Price set to ‘absorb’ some of the fixed costs of production


Marginal Cost Pricing



• Marginal cost – the cost of producing ONE extra or ONE fewer item of production

• MC pricing – allows flexibility • Particularly relevant in transport where fixed

costs may be relatively high• Allows variable pricing structure – e.g. on a

flight from London to New York – providing the cost of the extra passenger is covered, the price could be varied a good deal to attract customers and fill the aircraft



• Example:

Aircraft flying from Bristol to Edinburgh – Total Cost (including normal profit) = £15,000 of which £13,000 is fixed cost*

Number of seats = 160, average price = £93.75

MC of each passenger = 2000/160 = £12.50

If flight not full, better to offer passengers chance of flying at £12.50 and fill the seat than not fill it at all! *All figures are estimates only


Contribution Pricing


Contribution Pricing

• Contribution = Selling Price – Variable (direct costs)

• Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs

• Similar in principle to marginal cost pricing

• Break-even analysis might be useful in such circumstances


Target Pricing


Target Pricing

• Setting price to ‘target’ a specified profit level

• Estimates of the cost and potential revenue at different prices, and thus the break-even have to be made, to determine the mark-up

• Mark-up = Profit/Cost x 100


Cost-Plus Pricing


Cost-Plus Pricing

• Calculation of the average cost (AC) plus a mark up

• AC = Total Cost/Output


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Price Quotations

• List pricesList prices: Established prices normally quoted to potential buyers

• Market priceMarket price: Price that an intermediary or final consumer pays for a product after subtracting any discounts, rebates, or allowances from the list price


Discounts and Allowances• Quantity discount:Quantity discount: The more you

buy, the cheaper it becomes-- cumulative and non-cumulative.

• Trade discountsTrade discounts:: Reductions from list for functions performed-- storage, promotion.

• Cash discountCash discount:: A deduction granted to buyers for paying their bills within a specified period of time, (after first deducting trade and quantity discounts from the base price)


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• Reductions from List Price Reductions from List Price •Cash discountCash discount: price reduction

offered to a consumer, industrial user, or marketing intermediary in return for prompt payment of a bill •2/10 net 30, a common cash discount notation, allows consumers to subtract 2 percent from the amount due if payment is made within 10 days


3/10, NET 303/10, NET 30

1/7, NET 301/7, NET 30

Percentage to bededucted if bill is paid within specified time

Percentage to bededucted if bill is paid within specified time

Number of days fromdate of invoice inwhich bill must bepaid to receive cashdiscount

Number of days fromdate of invoice inwhich bill must bepaid to receive cashdiscount

Number of days fromdate of invoice afterwhich bill is overdue

Number of days fromdate of invoice afterwhich bill is overdue

Calculating a Cash Discount

Copyright © 2001 McGraw-Hill Ryerson Limited19-42

• Trade DiscountsTrade Discounts: payment to a channel member or buyer for performing marketing functions; also known as a functional discount


• Quantity discountQuantity discount: price reduction granted for a large-volume purchase• Justified on the grounds that large

orders reduce selling expenses, storage, and transportation costs

•Cumulative quantity discounts reduce prices in amounts determined by purchases over stated time periods

•Non-cumulative quantity discounts provide one-time reductions in the list price


• AllowancesAllowances•Trade-in: credit allowance given for a

used item when a new item is purchased

•Promotional allowance: advertising or promotional funds provided by a manufacturer to other channel members in an attempt to integrate the promotional strategy within the channel

• RebatesRebates: refund for a portion of the purchase price, usually granted by the product’s manufacturer


THANK YOU FOR ATTENTION!

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Copyright © 2001 McGraw-Hill Ryerson Limited Lecture 4 Pricing policies of pharmaceutical companies