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

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Price vs. Nonprice Competition price competition,In price competition, a seller regularly offers products priced as low as possible and accompanied by a minimum of services. nonprice competitionIn nonprice competition, a seller has stable prices and stresses other aspects of marketing. value pricingWith value pricing, firms strive for more benefits at lower costs to consumer. relationship pricing,With relationship pricing, customers have incentives to be loyal-- get price incentive if you do more business with one firm.

Copyright © 2001 McGraw-Hill Ryerson Limited 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 nonprice competitionmany firms would prefer to engage in nonprice competition by building brand equity and relationships with customers

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited 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?

Copyright © 2001 McGraw-Hill Ryerson Limited SELECT PRICING OBJECTIVE SELECT METHOD OF DETERMINING THE BASE PRICE: Cost-plus pricing Price based on both demand and costs Price set in relation to market alone DESIGN APPROPRIATE STRATEGIES: Price vs. nonprice competition Skimming vs. penetration Discounts and allowances Freight payments One price vs. flexible price Psychological pricing Leader pricing Everyday low vs. high-low pricing Resale price maintenance The Process: An Illustration

Copyright © 2001 McGraw-Hill Ryerson Limited Pricing Strategies

Copyright © 2001 McGraw-Hill Ryerson Limited Penetration Pricing

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Market Skimming

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Value Pricing

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Loss Leader

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Psychological Pricing

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Going Rate (Price Leadership)

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Tender Pricing

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Price Discrimination

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Destroyer Pricing/Predatory Pricing

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Absorption/Full Cost Pricing

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Marginal Cost Pricing

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Marginal Cost Pricing 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

Copyright © 2001 McGraw-Hill Ryerson Limited Contribution Pricing

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Target Pricing

Copyright © 2001 McGraw-Hill Ryerson Limited 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

Copyright © 2001 McGraw-Hill Ryerson Limited Cost-Plus Pricing

Copyright © 2001 McGraw-Hill Ryerson Limited Cost-Plus Pricing Calculation of the average cost (AC) plus a mark up AC = Total Cost/Output

Copyright © 2001 McGraw-Hill Ryerson Limited Price Quotations List prices List prices : Established prices normally quoted to potential buyers Market price Market price : Price that an intermediary or final consumer pays for a product after subtracting any discounts, rebates, or allowances from the list price

Copyright © 2001 McGraw-Hill Ryerson Limited Discounts and Allowances Quantity discount: Quantity discount: The more you buy, the cheaper it becomes-- cumulative and non-cumulative. Trade discounts : Trade discounts : Reductions from list for functions performed-- storage, promotion. Cash discount : Cash 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)

Copyright © 2001 McGraw-Hill Ryerson Limited Reductions from List Price Reductions from List Price Cash discount Cash 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

Copyright © 2001 McGraw-Hill Ryerson Limited /10, NET 30 1/7, NET 30 Percentage to be deducted if bill is paid within specified time Percentage to be deducted if bill is paid within specified time Number of days from date of invoice in which bill must be paid to receive cash discount Number of days from date of invoice in which bill must be paid to receive cash discount Number of days from date of invoice after which bill is overdue Number of days from date of invoice after which bill is overdue Calculating a Cash Discount

Copyright © 2001 McGraw-Hill Ryerson Limited Trade Discounts Trade Discounts : payment to a channel member or buyer for performing marketing functions; also known as a functional discount

Copyright © 2001 McGraw-Hill Ryerson Limited Quantity discount Quantity 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

Copyright © 2001 McGraw-Hill Ryerson Limited Allowances Allowances 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 Rebates Rebates : refund for a portion of the purchase price, usually granted by the product’s manufacturer

Copyright © 2001 McGraw-Hill Ryerson Limited THANK YOU FOR ATTENTION!