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.

Over Deliver & Under Price: How Much is too Much? by Tammy Power

CUSTOMERS ARE AFTER TWO THINGS: the best price and the best value for their money. Naturally, you want to provide the highest level of value for the lowest price and still make a profit. Think that's easier said than done?

When price outweighs value, customers simply will not buy. When value outweighs price, customers will buy, yet companies won't reap the rewards they're entitled to. In trying to deliver the best product-service offering to customers, companies sometimes give away too much, leaving significant incremental revenue unrealized. So, how can you tell if you are delivering too much value at too good a price?

To understand if your company is over-offering, it's necessary to understand the price/value relationship. In a price/value map (far right), customers' perceptions regarding the fairness of price are plotted against their perceptions of the fairness of value in order to give a strategic overview of the competitive situation. The diagonal through the graph can be described as the fair value continuum. Any point along this line is where price matches value-whether or not this is the best point or your company is relative to where your competitors lie. In general, residing on the line is a good place to be when competitors reside on that line as well.Value-based pricing requires constant price adjustments to ensure all potential revenue is being captured. Pricing too high will result in your customers migrating to the competitor who seems to offer more value at a better price. On the flipside, providing an abundance of value for too little a price will undercut your own profit. In that situation, it's advisable to either raise the price or to reduce the amount of value by unbundling the product-service offering.

When a company charges too low for a high-value product, customers may start to question quality. Since price plays a role in the perception of a product's quality, a low price may convey the image of a low value product. This organization was extremely concerned with value, as delivering superior value to the customer was entrenched in all branches of its product offerings. Consequently, as the organization did not want to unbundle the value, it raised the price.The decision whether to reduce price or to reduce value is a strategic one and should be aligned with the company's goals and values. Understanding and communicating the delicate balance between price and value will result in customers who feel they are getting the most for their
money and allow organizations to optimize their profits.