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.
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