Value-Based Pricing of Pharmaceuticals in Canada: Opportunities to Expand the Role of Health Technology Asessment?

Husereau, Don; Cameron, Chris G. 16/12/2011 (CHSRF Series of Reports on Cost Drivers and Health System Eficiency: Paper 5)

KEY MESSAGES

• The rate of spending on health in Canada is rising faster than the rate of economic growth, creating concerns about the sustainability of Canada’s publicly funded healthcare systems. Expenditures on drugs is one of the fastest-growing areas.
• Canada’s public drug plans currently use a formulary system informed by health technology assessment (HTA) to manage drug expenditures. There are concerns that the current formulary system limits consumer choice, provider autonomy, producer innovation and patient access. For example, if a drug is perceived as having low or uncertain value for money by a payer, it might not be listed on a public plan formulary, challenging prescriber autonomy and leading to out-of-pocket expenses for patients.
• In addition, current pricing and reimbursement policies and practices in some provinces undermine the efforts of others to negotiate lower prices, resulting in higher prices for everyone (e.g. best price policies and confidential rebates). Further, this type of price discrimination based on provinces’ buyer market power is inequitable and can reduce access to drugs for certain individuals.
• To maintain private sector innovation, patient access, health system fiscal responsibility and sustainability, some jurisdictions internationally have turned to value-based price negotiation mechanisms. Value-based pricing consists of negotiating prices for new pharmaceuticals based on the value the new drug offers society, as assessed through HTA.
• Domestic and International evidence suggest that an effective and accepted mechanism of determining reimbursement price can result in reductions in net pharmaceutical expenditures.
• Canadians would benefit from a pricing system with two distinct features: 1) pan-Canadian coordination, to reduce the potential for whipsawing; and 2) real-time evaluation of the drug value and feedback, to create more opportunities for negotiation. The single price negotiation would (i) determine which drugs would require price negotiation, (ii) clearly communicate to stakeholders what constitutes good “value” and how this will be translated into a price, and (iii) have the legislative authority to negotiate price on behalf of other provincial (and federal) jurisdictions and to keep negotiated prices confidential.
• A single, coordinated price negotiation body would help reduce inequity across jurisdictions by leveraging the buying power and macroeconomic factors of provinces with larger drug budgets to those provinces with much smaller budgets and smaller industrial incentives. It would promote a standard regarding which interventions are legitimately valuable to society and which are not.
• A price negotiation mechanism tied to real-world assessment would allow for even more options for price negotiation. Real-world assessment of drugs would increase the capacity to conduct disciplinespecific research, monitor health products throughout their lifecycle and strengthen Canada’s knowledge economy.

How mature is your company in (Pricing)? Take the Pricing IQ Quiz and find out!

Pricing IQ Quiz - SPMG Pricing Hierarchy of Needs.

INTERPRETING YOUR SCORECARD

Click here to begin your Pricing Quiz

This pricing IQ Test is designed to evaluate and quantify your companies perceived performance across a wide set of organizational pricing "Best-Practices" in an effort to achieve pricing process excellence.Your scorecard provides you with both a TOTAL PERFORMANCE SCORE and an INDIVIDUAL SCORE across each of the Pricing Performance Stages.  It's important to view all scores across each of the stages as they contribute in aggregate to your overall score.  We've taken the liberty to access each of the five stages respectively, to provide you with insight around possible areas of deficiencies. 

            If you score less than 75% in any of the five stages, we can provide further insight or one-on-one professional advice. 

      Over 95% = Outstanding

      95%-86% = Excellent  
      85% – 76% = Good        
      75% - 65% = Inadequate  
      Under 65% =  Failure to meet Minimum Standards

STAGE 5 - Strategic Process Alignment 

*less than 80% suggests a shortcoming in meeting pricing process maturity and excellence through seamless and consistent execution across all business units. Moreover, it is impossible to make the transition without linking the changes to processes, tools, technology, and company culture. 

            In order to obtain a score above 80%, the following areas of efficiency must be analysed and, where necessary, changes implemented: 

1.   Value-Based Pricing & Training

2.   Cost differentiation of Products & Customers

3.   Cost benefit analysis of potential outcomes and likely competitor responses

4.   Alignment of corporate goals and objectives with pricing strategy

5.   Data mining and harvesting of Internal and external data to measure and optimize revenue

6.   Efficient Communication and dissemination of information to the tactical team who supports the company goals and objectives.

STAGE 4 - Analytical Tools/Revenue Optimization 

* less than 80% suggests that your organization has fallen short integrating data-driven software tools that provides relevant, dynamic information to facilitate both pricing tactics and strategies in real-time.   A comprehensive pricing strategy requires both the alignment of organizations goals and objectives, as well as the tools to help facilitate the pricing process.

      To score above 80% your company must address the following pricing process options. 

1.     Developing capabilities in Customer Relationship Management

2.     Developing capabilities in Price & Revenue Management

3.     Utilizing forecasting algorithm models

4.     Quantifying value of product advantages using internal and external tools

5.     Clarifying who’s buying what and obtaining ‘Buy-in’ from various functions whether       ‘we’ really need this customer.

 

STAGE 3 - Primary Research/Competitive Intelligence 

*less than 80% suggests your company has failed to utilize or adequately determine the role of pricing in your product positioning. External research is critical in helping to expose a customer's current and/or future willingness to trade price for value. Furthermore, the importance of conducting Stage 2 research cannot be overstated, as this is the only representative stage of value-based pricing that quantifies an 'outside-in' rather than an 'inside-out' approach towards obtaining information about market share, price-elasticity of demand, revenue and profitability expectations.

 A score of less than 80% requires that the following options be improved upon: 

1.     Identifying relationships between price, discounting and any number of dimensions

2.     Price and discount trends by customer characteristics

3.     Impacts of discounts and allowances

4.     Identifying and defining Best & Worst Customers

5.     Impact of price on growth, volume, market share, margins and revenue

 

STAGE 2 – Historical Product & Customer Analysis

*less than 80% is an indication that your organization is not ‘digging deep enough' to use internal and available data to institute tighter control of the pricing process. Though the past is not a predictor of the future, it does help an organization to understand and quantify the value proposition of its offerings. It is also necessary to develop a process that helps to segment the market, understand the value delivered to those segments and to use the information in its upward climb toward the next stage of pricing excellence.

 A score of less than 80% requires that the following options be improved upon:

1.     Clarify who’s buying what and do we really need this customer

2.     Determine emerging trends

3.     Determine how price and other factors can be used to manage competitors

4.     Identify how customers respond to price changes and structures

5.     Managing conflicting objectives like profit and volume when making pricing decisions

STAGE 1 - Tactical Process Alignment

*less than 80% highlights a weakness across your pricing process.  Typically companies with a weak score in Stage 1 are relying on individuals that have been around for many years and are referred to as ‘Price Czars’ to develop prices using ‘gut’ intuition.  Often organizations react to market forces making pricing decisions under a high-level of stress and departmental gaming rather than sound, researched decision making.

      To score above 80% your company must address the following pricing process alignment options. 

1.     Prioritize the significant attributes towards achieving your organizations goals e.g. profitability, growth, market share, market leader, retention of customers, maximized plant capacity, etc

2.     Implementing tools and processes to gain control of pricing

3.     Removing inconsistencies of price across products, customers and markets

4.     Providing facts and analysis into the pricing process

5.     Clarifying roles, responsibilities and expectations around administering and developing prices

Why Mid-Market Companies can reap even greater returns by investing in pricing solutions?

“Mid-Market” Blog

By: Vernon E. Lennon, III

In today’s conversation we look at why Mid-Market companies can benefit even more greatly from investments in pricing solutions / services / software.

For over 20 years now the Pricing industry has primarily focused their efforts on the “Billion plus” target customer while offering little attention to the larger group of smaller cousins.  While the industry has been in growth mode during this time frame due to some customer internal knowledge of the pricing lever, this doesn’t equate to Mid-Market customers not needing the attention.  Rather I contend due to the demand and the ROI considerations; the pricing industry has primarily focused their marketing campaigns on the “big boys”.  I further suggest that a two pronged approach in the future can not only help the Pricing Industry grow, but can also educate and assist a largely untapped segment.

After all in the U.S. alone there are thousands more of the “sub 1 Billion” customers all looking for enhanced valuations (more fodder here in a future post) and yearning for learning on how to do so.  Couple this with the greater potential for “quick win” returns leading the charge on change management and cemented executive commitment and this pool of companies appears to be ripe for collaborative improvement. 

So let’s take a look at my top ten reasons why this segment is poised to benefit more from pricing assistance.

Mid-Market Companies:

1. Typically don’t have dedicated pricing departments.  In fact many of these companies’ functional departments are responsible for multiple areas and thus only focus a small portion of their time dedicate to price management.
2. Historically have grown out of an idea / innovation, not through business efficiencies.  Ideas and innovation have led them to a great position in the marketplace, but as the maturation cycle has evolved this competitive position is eroding.
3. Tend to be Sales Led vs. Sales Centric.  Historical desires for growth have given the sales organization too much leeway on order taking.  Rather than providing them with central led enhanced information, central offices often relinquish majority control on ultimate pricing decisions.
4. Volume oriented.  Strategies for growth and overall compensation metrics (Sales and Executive) often are too heavily weighted on top line growth, hence there is no impetus to “walk away from bad business” and focus majority efforts on profitable customers only.
5. Believe the forward supply chain typically has greater leverage.  In many cases, Mid-Market companies are selling into customers and channels that are much larger than they are, like the “big box” stores.  This offers the appearance of limited leverage, and without proper controls in place margin leakage here can be great.
6. Assume they need large capital budgets for software solutions.  Due to a lack of clear education and communication, many companies in the segment don’t realize there are some “value” priced SaaS Software packages and Solutions that can firmly meet and beat their pricing needs.
7. Deal with data inefficiencies and information inconsistencies.  Much like their larger cousins lack of data control is perceived to be a road block, but this isn’t necessarily the case (see October 2011 PPS Presentation on Virtual Markets).  In fact there are many existing techniques that can assist companies with taxonomy and hierarchy improvements along with firm graphics enhancements.
8. Often fail to project a true image of value to the marketplace.  Lack of investment in clear “voice of the customer” initiatives or value mapping / attribute selection analysis leaves companies not enabling a powerful market based message.
9. Lack of clear executive commitment to price.  Too many short term initiatives and too few resources often lead to operational paralysis and no clear leadership on how to capture value through the price lever.
10. Lack of Pricing Strategies, Policies & Processes to support organizational behavior.  Limited clear concrete messaging often leaves loopholes of operation and limits the rigor in price deployment.

In conclusion, a large number of Mid-Market customers continue to go un-served by the Pricing Industry as training, education and marketing are too often oriented toward larger customers.  That said, given the points made above, the “need” appears to be greater for the Mid-Market segment and the potential returns that much higher.  With the proper focus on information dissemination by the Pricing Industry, the right tools, solutions and services provided for quick wins with commensurate plans for long term change, the future can be bright for all Mid-Market customers wanting to find greater price competency. 

Mid Market Blog – The rise of the Mid-Market Customer

Posted by: Vernon E Lennon III

Once again PPS Las Vegas was fantastic and the expenditure an investment in the future. While I found the content interesting and the community invigorating, I still felt something missing from the conference. Glancing around I noticed many presenters from large firms including; software, consulting, and operating companies. Analyzing the cross section of attendees I found the characteristics to be very much the same. While larger companies have traditionally dominated these conferences in the past for good reasons, were was the Mid-Market audience?

Now, I understand the ‘larger’ customer to be the “bread & butter” not only for PPS, but also for larger consulting firms and software providers. Have we over looked our mid-market cousins, and as such squandered some incredible opportunities? Arguably mid-market customers have a greater need for learning, consulting and potentially software services given the fact their people often “wear multiple hats”, and the majority of mid-companies lack dedicated pricing departments.

Don’t get me wrong, there was some “content” addressing mid-market customers presented at the conference in Las Vegas. In fact my presentation on “Virtual Markets” was focused on mid-market players predominantly, and I also saw some software providers showcasing “SAAS Solutions” (software as a service) that are more than appropriate for their needs.

The mid-market customer tends:

1. …to have grown out of a “need” or innovation cycle that has led to their current size.
   
2. …to focus more on operating issues than enhanced efficiencies / proficiencies and as a result likely has no budget for pricing.
   
3. …to have more strained internal resources to manage price, hence has a greater “need” for pricing education, services, solutions and software.
   
4. …to take more time to decide on how to manage the price lever, in order to mitigate the risk of a poor investment.
   
5. …to benefit more from internalizing pricing competency through what PPS has to offer.

In short, PPS is fantastic at championing the need for pricing within companies, and I am blessed to have been a part of it for many years. I would love to see it grow to be representative of a truly domestic business mix. A few companies have started to recognize the potential here, but while these providers have great solutions it remains only the tip of the iceberg. I know the pricing community has much to share with the mid-market audience and even more to learn.

Govt to consult on drug pricing in December

Article Found at: http://www.pharmatimes.com/article/10-11-11/Govt_to_consult_on_drug_pricing_in_December.aspx

Written by: LYNNE TAYLOR

Consultation on the government’s plans to introduce value-based pricing (VBP) for medicines will begin next month, the Department of Health has announced.

The consultation will run until next March, the Department reveals in its newly-published business plan for 2011-15. The plan sets out the coalition govenrment’s structural reform priorities for health care, which are to: - create a patient-led NHS; - promote better healthcare outcomes; - revolutionise NHS accountability; - promote public health; and -reform social care.

These reforms “will help to create a world-class NHS that saves thousands more lives every year by freeing up resources to go to the front line, giving professionals power and patients choice, and maintaining the principle that healthcare should be delivered to patients on the basis of need, not their ability to pay,” says the Department.

The introduction of VBP comes under the document’s Structural Reform Plan aiming to promote better healthcare outcomes. This will involve shifting the focus and resources away from “bureaucratic process targets” and towards measures such as national health outcomes, patient-reported outcome measures (PROMs) and patient experience measures.

The Plan states that development with drugmakers of a new pricing process for medicines will get underway from next April and be introduced after the current Pharmaceutical Price Regulation Scheme (PPRS) comes to an end in January 2014, Moreover, a “milestone” of the Plan will be the establishment, in April 2012, of the National Institute for Health and Clinical Excellence (NICE) “on a firmer statutory basis,” it notes.

Other actions aimed at promoting better health outcomes will be: - scrapping process targets and introducing national health outcome measures “to prioritise the health results that really matter;” - reforming Payment by Results to provide incentives for healthcare services to deliver high-quality care; devising a palliative care funding system that is responsible to the wishes of patients, “while being fair to all providers and affordable to the public purse;” and - providing support for the NHS to release up to £20 billion in efficiency savings over four years, for reinvestment across the system.

The Department also pledges to improve data transparency, which it says is an important principle and can also help to promote efficiency and drive down costs.For example, the business plan notes that “the breakdown of NHS expenditure into different disease classifications helps NHS Trusts to identify where their costs are out of line with those of the best. Making such information available will also help the public and other stakeholders to identify wasteful expenditure, further increasing efficiency.”

The document also notes that there may be gaps in information about which the Department is currently unaware. Therefore, prior to the introduction of any Right to Data legislation, requests by the public for the release of datasets can be made through the Department’s Customer Service Centre.

The business plan will be refreshed annually, and each month the Department will publish a “simple” report on its progress in meeting the commitments set out in the document, it says.

CAN YOU CAPTURE & VALUE THE PRICE OF SPEED?: OUTSOURCING FOR DRUG DEVELOPMENT & MANUFACTURING

Article by: Michael Hurwich, Dr. Doug Treen & Tammy Power

Outsourcing drug research has become more popular, not only because of increased efficiencies in third-party core competencies, but also because numerous Pharmaceutical & Biotech companies are often challenged with conflicting budgets, dated equipment, software or knowledge that may or may not fall short of existing regulatory allowances. 

Emphasis has traditionally been placed on chemical methodologies over technological advances and process design, therefore, even if a faster process is discovered many companies do not have the capacity or budget to execute it.

What does all this mean? 

Well, since time is of the essence in drug discovery, any delay in R&D becomes a double-edged sword. Costs increase & revenue is not realized sooner. With the aforementioned challenge in mind, we conducted proprietary research with customers and non-customers to determine whether pricing for the "Speed of Service Delivery" would contribute to top line revenue. The goal of the research was to determine whether our client could price for Speed? 

This article will provide you with some food-for-thought by drawing upon research conducted with companies from Pharma, Biotech and Clinical Labs - both small & large.

Pharmaceutical and Biotech companies occasionally have conflicting budgets and agendas for lab time usage and are often not performing effectively & efficiently in an effort to identify or produce new drugs for approval and sale. One attribute third-party companies can leverage over their larger Pharma and Biotech counterparts is the ability to develop rapid-response upstream R&D and step-up manufacturing downstream. Smart companies that are outsourcing their available expertise and recent technology will capture additional value brought forth by their core competencies through price.

Capturing this incremental value through price comes into play when time is of the essence and sheer speed itself becomes a highly valued element for an organization. The question therein lies, just how valuable is it? In drug development, the answer is very valuable! When a Pharmaceutical or Biotech organization is in the development stage of their R&D process, timing is critical. The greater the number of assays that can be conducted in a uniform and systematic timely fashion, the greater the probability of hitting a winning formula that equates to a multi-million dollar success. How can a Pharma, Biotech or Clinical Lab increase the odds of discovery? Partnering with third parties to deliver specialized and available targeted developmental services can exponentially increase the odds.

 We know it's desirable for customers to seek rapid turnaround time for product development - a highly valued attribute; but is the industry willing to pay a significant premium in order to beat the competition for both FDA approval and the Patent office? Through our research, we found third-party companies can validate charging a higher price as they are providing customers with a highly valued and dedicated service in an expeditious amount of time. Speed becomes a value-added attribute and a tremendous asset to their service delivery solution. As such, companies that outsource their expertise and technology in a third-party relationship can capture value and the resulting incremental revenue by pricing according to their customer's need for rapid service in the arena of drug development and manufacturing.

SPEED IS OF THE ESSENCE - WORKING WITH THIRD-PARTIES

 In the Pharmaceutical & Biotech industry, turnaround time for new drug development is vital to their success and can be achieved by understanding:

1.	The more assays that can be conducted and completed in the developmental stage in a narrower span of time, the greater the odds for discovering a successful formula, the quicker the results are presented to the FDA and other regulatory bodies and if approved, the quicker to market.
2.	The cost could be reduced to develop a drug as information is banked through previous efforts at discovering a winning formula by a third-party that has obtained incremental knowledge by researching for other Pharma's or Biotechs with similar or like drug discovery.
3.	The cost to develop a drug is an expeditious manner is far outweighed by the potential revenue realized by sooner bringing the product to market.

In an effort to quickly bring the potential drug to market sooner, many experiments must be conducted to both discover a winning formula and satisfy regulatory requirements. The industry looks to effectively maximize the amount of tests conducted in an effort to find a champion in the most efficient time span possible. The greater the number of tests completed, the faster the profitable drug can be discovered and presented for FDA approval. Outsourcing lab services is widely used at various points in the drug discovery process. Third-party companies can focus on their core competencies (including speed) in both drug development and manufacturing. Our research noted that many Pharmaceutical companies traditionally strong in drug research and development would consider outsourcing for manufacturing assistance if quality & speed could be ensured through the step-up process, whereas Biotechs may require more efficient and less expensive R&D processes at different developmental stages.

MATCHING SPEED WITH PRICE

It is important to note that a large portion of R&D costs are allocated in the initial stages of drug development, yet a return is not generated until the drug actually goes to market. The faster a patent can be obtained, coupled with the speed to market of a new drug, the faster a company can maximize profit through the utilization of optimum value-based pricing models before competitors start production of their own generic or like knock-offs. To sustain a consistent revenue stream, new products must be developed and brought to market in the most efficient manner possible in order to offset declining prices and ensuing revenues from older well-known brands that may be in the remaining years of patent protection, thereby becoming susceptible to a competitive threat from their generic counterparts offering lower-priced alternatives.

CAN I CHARGE MORE FOR SPEEDY RESULTS?

Value-based pricing revolves around knowing your customer and understanding what constitutes their decision selection criteria to achieve both your mutual goals and objectives. Capturing all that drives a customer's purchase and ensuring that you can deliver on these attributes is key towards generating incremental revenue through value-based pricing. A value tradeoff is made when incremental value is priced at the appropriate incremental rate. Simply put, customers are willing to pay a higher price for something they attach a higher value rating towards.

Pricing services based on how the value proposition is perceived by the customer is a proven method for any company to help realize corporate goals and objectives of improved market share, ROI, revenue or profitability. Through our pricing research, we found speed to be a highly valued element in the arena of drug development as companies are willing to pay above market prices if such services can be executed in a timely fashion by a third party.

Companies' outsourced services will yield greater value if they are able to offer their customers fast, consistent and reliable research at various stages throughout the drug development process. With this realization, third-party vendors can capture additional incremental value by "pricing for speed". In determining an accurate pricing formula for third-party outsourcing, one must first estimate the worth of additional value the customer places on significant time savings, and then adjust prices accordingly to share in the supplementary value presented to the customer.

In a recent study, The Foundation Group found that small and large Pharma's and Biotechs in the United States were willing to pay significant premiums for faster results. In some cases, customers were willing to pay upwards of 30% based on a 10-30% timesaving. This willingness-to-pay varied according to the type and size of the customer within the organization and industry. (See Chart of Findings, n=56) The value of pricing for speed is emphasized as even the smallest timesaving of 10% still yielded a willingness-to-pay premium of 3-10%.

PROFITABLE SEGMENTATION

Different customer segments allot varying amounts of value to the vital attribute of "speed" depending on the priority & ranking attributed to the aforementioned in a customer's decision selection criteria. The price premium attributed to the speed of drug development also depends on the type of customer, in addition to the extent to which time is of the essence in their operations. If a customer places high priority on development of a certain drug, and/or the company is less price-sensitive, they are more apt to pay above market prices in a race to evaluate & validate the experiments in the R&D process.

Customers can further be clustered into three distinct market segments: price sensitive, strategically focused and loyal. Once these markets are determined, a third-party contracted to conduct various stages of drug development can significantly improve incremental revenue.

1st Segment - Price Sensitive Segment. These companies have a low threshold for pricing pain and place a higher priority on price over speed. For a third-party company, this segment represents the least opportunity in terms of additional revenue resulting from offering time savings.

2nd Segment - Strategically Focused Segment. Customers are value driven. These customers will make a trade-off between price and a value-added element (e.g. speed of service), thereby justifying a price premium for service that provides them with incremental value.

3rd Segment - Loyal Segment. A change in price will not affect their willingness-to-pay. These customers are willing to pay a higher price for an increase in value; therefore, since speed has been determined to be a valuable commodity, the greatest opportunity for a third-party vendor relationship for profitability resides within this segment. Additionally, this segment's loyalty is likely the result of a longstanding, credible relationship with a history of consistent and uniform analysis. A customer risks compromising existing test results and regulatory approvals if new tests are conducted with a new or different vendor.

The challenge and goal is to quickly evaluate and validate which companies within which industries are either price sensitive, strategically focused or loyal. Once the market and customer segments can be determined, a price-metering exercise is warranted to determine each customer's price/value tradeoff associated with the attribute of "speed".

Use segmentation to select or reject customers that place little value on "speed" through their willingness-to-pay. Price segmentation is often used to identify which group of customers is the best to serve. Although these customers are targeted, many companies cannot resist the temptation to sell their services to the whole market in a misguided attempt to grab market share. Consequently, serving the unprofitable "price-sensitive" segment at the expense of profitable customers bogs down these companies.

PRICING SPEED OF SERVICE TO THE MARKET

Third-party companies can recognize the unique advantage of "pricing for speed" and price their services, both in research and step-up manufacturing accordingly. The goal and objective is to understand how "speed" obtained by outsourcing available capacity, expertise and technology for drug development and manufacturing services can equate to greater revenue for both parties involved. In fact, the revenue gained by being first-to-market will far exceed the cost to outsource.

In conclusion, in the Pharmaceutical and Biotech industry, the fastest possible turnaround time for a new drug launch is critical for success. Within this industry, companies clearly consider the attribute of "speed" to be of great importance, and value it accordingly based on the segmentation pattern to which they would reside. Speed to market translates into superior performance allowing Pharmaceutical and Biotech companies to gain a leg-up on competing generic counterparts by stretching short-term exposure to revenue erosion.

Bundling to reduce customer churn and erect competitive barriers

CASE STUDY: As deregulation in the US telecommunications industry leads to an increasingly competitive environment, existing local exchange companies (LECs) are realizing that much of their customer base is at risk to impending competition. Bell South has responded with an innovative bundling strategy to help retain its customer base and to raise the barriers for new entrants.

Background

In the face of deregulation, Bell South - the incumbent LEC for several southern states and the largest regional Bell operating company - recognized the need to develop a strategy that would defend against imminent new entrants and protect its customer base. The result was a massive effort to re-fortify its brand image and the development of a customized bundled package of telephone services known as -Bell South's Complete Choice".

In the short-term, Complete Choice is expected to increase customer usage of a variety of calling features while reducing overall calling feature churn. Bell South believes that the flexibility and superior value of Complete Choice will offer customers a reason to choose and keep an enhanced service package. Ultimately the program is designed to assist in counteracting market penetration tactics from new entrants in the local exchange market in order to maintain Bell South's customer base.

Bell South's Strategy

Bell South recognized the need to strengthen its brand equity, and more specifically, to provide its customers with clear reasons to

remain loyal. Strengthening the Bell South brand name was initiated by undertaking the largest ad campaign in the company's history. However, the challenge of actually delivering real value to customers in the marketplace had to be met.

One of the responses to that challenge was Complete Choice, a program that allows customers to customize their own telephone service feature bundles. For a standard flat rate the customer can choose from a number of calling features. Furthermore, if the customer decides to change the features in the bundled package at a later date, the same flat rate continues to apply. This encourages customers to try unfamiliar service features without encountering undue risk, while ensuring revenues from the customer's account remain constant.

Bell South's Complete Choice provides maximum utility of telephone service by offering customers the option of self-selecting their ideal service feature package. Bell South is able to demonstrate that Complete Choice provides substantial value to customers over and above standard or more structured telephone service offerings.

In considering pricing approaches, Bell South concluded that most customers were unlikely to pay for five or six individually priced features, even at discounted prices.

It was considered probable, however, that many customers would pay a premium flat rate for a self-selected bundled product. Such a pricing structure could allow Bell South to sell more of its features, maintain the integrity of its pricing across its service portfolio, and reduce overall service feature churn within its customer base.

The Results

To date Bell South's Complete Choice program has been offered in a number of its operating markets with an encouraging level of customer interest. The program has met its short-term objectives of reducing calling feature churn and increasing trial of new calling features. At the same time Bell South has been able to convert many of its "call waiting' customers to the Complete Choice program; the effect has been to increase revenues to between $12 and $15 over base rate, from only $4 over base rate previously paid by "call waiting' customers.

The jury is still out on the long-term success of Complete Choice and its effectiveness in retaining Bell South's customer base in the local exchange market. It is hoped that as new competitors enter the local exchange market in Bell South states, they will find it a daunting task to develop and offer service packages with as much breadth, depth, and flexibility as Complete Choice.

In order to remain the undisputed market leader Bell South will need to continue to demonstrate through service innovation that its customers are making the correct choice in staying with Bell South as their preferred local exchange company.

Lessons Learned

Bundling strategies can enable a company to identify relatively price insensitive customers who are willing to pay for demonstrated product and service value. The result can provide opportunities for revenue enhancement by developing value-added bundled offerings for specific customer segments. Innovative bundling of product and service features can provide customers with lower risk for trial and lead to broader acceptance of new product and service offerings. Potential barriers to competitive entry can be erected through the use of bundling as would-be entrants recognize that an equivalent level of perceived value at competitive prices is unlikely to be achieved

Capturing the value of technical innovation

Article by Michael Hurwich, President of SPMG

In many industries, technical innovation is essential in order for companies to remain competitive. But innovation alone is not enough…

Despite their success in creating new products or services, many companies in industries where innovation is a required trait have problems in turning the technical value of their innovations into added profits. The promise of a return on investment for the research and development invested in new products seldom materializes, frustrating both management and shareholders alike.

There are several reasons why this occurs:

1. Focus on market share: There is often a temptation in organizations to use technical innovation solely as a method of capturing market share from competitors. This strategy typically undervalues technical innovation because it fails to recognize that while not all customers will value the innovation, those who do are usually willing to pay a premium for it. As a result, the market share lift usually occurs only within those segments that would have been willing to pay a higher price for the innovation, had a higher price been set. Among other market segments, there is little impact.

2. Misreading customer acceptance: Some organizations are too optimistic about the value of innovation and place a higher value on it than their customers do. This can occur when managers become wrapped up in product innovation and see customers as equally enthusiastic about technological breakthrough, without any grounding in research for the opinion.

Another less common problem lies in underestimating customers' willingness to pay a premium for the value of the innovation. Typically this occurs because a company fails to recognize the ancillary benefits that might arise from using new products, or because they fail to understand all the reasons that customers choose a product or service in the first place.

Take, for example, the case of a major chemical supplier who recently introduced a new product that significantly reduces the quantity of the product that customers have to use in order to achieve the same results as the older version provided. While the pricing formula took into account the reduction in volume required, it did not adjust for changes to transportation or storage costs. Consequently, customers received an added value through lower shipping and inventory costs. This value could have been reflected in the price of the product, leading to higher profits.

3. Ill-advised discounts: Many companies establish inappropriate volume discounts for innovative new products with a premium value. These discounts erode most of the value and reduce the profitability of the innovation. Partition pricing - reviewed below - can provide an answer to the discount dilemma.

4. Cost plus pricing strategies: Companies using cost plus pricing strategies may fail to achieve the higher prices warranted by higher value products. This results when new product innovation leads to lower production costs, but the manufacturer fails to take into consideration that the value of the product to the customer has been enhanced. As companies adopt more effective means of making the product, or achieve the same product characteristics with a smaller package, those who use cost plus pricing strategies will automatically lower the price for the product without considering the increased value of the product. These pricing formulas may also lead to a reduction in absolute profit.

Take, for example, a product that sells for $1.00 per unit, with a current production cost equal to $0.80, and a gross profit equal to $0.20 per unit. Gross margin is thus 20% and mark-up is 25%. Now suppose that a new product is introduced with a production cost equal to $0.60 per unit. If the company applies the same mark-up of 25% to this cost, the price for the new product would be $0.75, with a gross profit of $0.15 per unit. While the gross profit in percentage terms remains the same (20%), actual profits have declined by $0.05 per unit. If the company sells the same number of units, actual profits will have declined by 25%.

Capturing value from innovation

There are several ways a company can ensure that the benefits of innovation include increased profitability. Below are some of the steps to consider in implementing a more effective pricing strategy.

Establish and communicate clear strategic objectives

As with any strategic issue, setting the price for innovation should start with a clear understanding of what it is you want to achieve. In many organizations there will be some internal conflict over the objectives for the new product. These differences of opinion need to be aired at an early stage and resolved before the pricing strategy is implemented.

Once established, the strategic objectives need to be communicated to everyone within the organization, from finance to sales, to ensure that the strategy will be implemented properly. This step, more than any other, is critical to ensuring that whatever the price set for technical innovation, it will be maintained through to the customer.

Measure customer value

Measuring customer values and trade-offs is a key step in the process of determining the value that customers will place on a new technology. Discrete choice analysis can be used to measure specific customer values, and to compare buying decisions against existing products. Having a clear understanding of customer value is often critical to the process of establishing and maintaining premium prices for technical innovation in the field. This research can be used to support and direct the sales organization. Consequently, it is important to communicate clearly the results of any measurements throughout the organization.

Review the advantages of value based pricing

Value based pricing strategies will more often lead to higher profits than either cost plus or competitive based strategies when applied to new products or services. This is because value based pricing is designed to take into account the added value that innovation provides customers and to capture a portion for the innovator. Even where market share gains are a priority, value based pricing is a more effective method of establishing a price that balances market share gains with optimum profits.

Consider using partition pricing

Partition pricing is the practice of separating elements of a total price from one another. For example, technical fees or other charges might be separated from the base fee of the product or service. This approach is particularly useful when there are existing discount programs that may apply but which may erode profitability if applied to a product/service innovation. By using partition pricing, a company can reduce or eliminate the negative impact of discount programs on the profitability of new technological innovations.

With partition pricing, companies separate the technology from the base product or service only on the invoice, where a technology fee or other charge is added to the base price. These fees are based on the value of the new technical innovation that has been added to the product and are not subject to discounts.

DIAGNOSING THE PRICE FOR A NEW DRUG: THE PHARMACEUTICAL INDUSTRY'S GREATEST CHALLENGE by Michael Hurwich

An aging population, technical innovation and more informed patients with better access to medical information are driving the demand for new and innovative therapies.

While many companies put more and more resources into the back-end of R&D, they often ignore opportunities to increase profitability through the front end by using a value-based approach to new product pricing. The challenge is to alleviate pricing pressures by establishing customer-perceived value for the drug before establishing a new product line.

STEP 1: Target and Focus. 

Examine the value the product offers and determine how this will benefit customers. Careful analysis of the new drug should be undertaken in order to establish a realistic prediction of revenue and profitability for the company. To determine the expected value the product offers, the attributes that comprise the product value need to be confirmed and evolved. These attributes will help determine the drug's value, which in turn will perform as a predictor of future sales. Many methods are used to identify these attributes, such as customer surveys, conjoint measurement, focus groups, internal forecasting, historical regression, reference and price metering.

STEP 2: Competitive Environment. 

A close examination of the retail competitive environment aids in determining the price placement of a new product. Customers considering similar products or alternatives will scan their product options or non-product options, in developing a consideration set. Within this consideration set, customers will develop a hierarchy of brands/products based on their assessment of value towards relieving various symptoms. In addition, a reduction of side effects most commonly influencing quality of life contributes to a value weighting. Typically, customers will choose the brand or product at the top of their hierarchy, if it's available. Perceived competition, therefore, assists in the evaluation of product pricing and positioning.

STEP 3: Price Metering. 

A price metering survey should be an initial step in determining the optimal price of a new drug. Price metering provides a range of prices customer may be willing to pay for the drug, depending on a series of tradeoffs:

-	Will the product decrease the time spent in the hospital?
-	Will the product eliminate the need for surgery?
-	Will the product permit more days on the job rather than off?
-	Does the product have minimal side effects?
-	Does the product increase quality of life?

If the majority of these answers are positive, it can be assumed that customers will be willing to pay a higher price for the value the product offers, to the extent it alleviates all or most of their symptoms.

STEP 4: Value/Price Mapping. 

The information acquired in the price metering survey is used to present the value of your company relative to that of your competitors, as well as the value the company is perceived to offer by the key customer set for each of your product offerings. A series of value maps are created that reflect customer value perceptions of different features and bundles relative to price.

STEP 5: Discrete Choice Analysis. 

Our elasticity tool and methodology effectively provides a snapshot of your customers' willingness to give up something in return for something else. It's often used to predict the choices that a consumer will make between drug attribute alternatives. This is an optimum methodology to sue for predicting price and the likely outcome in the marketplaces in a competitive situation.

STEP 6: Pricing Methodology Alternatives. 

Providing several strategic pricing and product attribute alternatives will assist in clarifying your company's goals and objectives for market share, profitability, revenue growth or ROI. Benefits, risks, advantages and disadvantages of various alternatives are provided to determine which approach meets your corporate objectives. Pricing these alternatives helps identify opportunities for increasing profitability and minimizing risk with your chosen customer segment and channel strategy.

STEP 7: Pricing Approach. 

The pricing strategy alternative selected must be consistent with your corporate, marketing and sales objectives.

What was once seen as a challenge is now an opportunity to build value perception in order to set a new product price. This step-by-step methodological approach provides your company with the tools and structure to effectively price the new drug. Utilizing this value-based pricing technique will help your company achieve optimal revenue and profitability.