1. Chapter 12 Pricing Pharmacist Services Based on Carroll, N.V., Pricing Pharmaceutical Products and Services, in Financial Management for Pharmacists: A Decision-Making Approach, Third Edition, Baltimore: Lippincott Williams and Wilkins; 2007. Norman V. Carroll, PhD Professor of Pharmacy Administration Virginia Commonwealth University School of Pharmacy Chapter 12 slides for Marketing for Pharmacists, 2nd edition

2. Learning Objectives Explain why pricing is an important part of marketing pharmacy products and services. Discuss how pricing relates to other elements of the marketing mix. List and discuss the effects of consumer- related factors, competition, pharmacy objectives, and costs on pricing decisions. Calculate the cost of providing a pharmacist service.

3. Learning Objectives (continued) Explain the relationships among price, cost, and demand for a pharmacist service. List and explain the steps involved in one strategy for pricing pharmacist services. List and explain methods of presenting service prices to consumers.

4. PRICE = INGREDIENT COST + SERVICE COST + PROFIT DISPENSING FEE Components of price Components of price

5. Measures of Rx ingredient cost AAC -- Actual acquisition cost AWP -- Average wholesale price (its really not) EAC -- Estimated acquisition cost MAC -- Maximum allowable cost -- multisource / generics AMP -- Average manufacturers price

6. Average per Rx profit Based on required return on assets Ex: $100,000 in Rx-related assets 12% required ROA 60,000 Rxs per year ROA = Net income / Assets NI = 12% x $100,000 = $12,000 NI / Rx = $12,000/ 60,000 = $0.20

7. Pricing Focus on value – what is product or service worth to consumer Value depends on –Consumer perceptions –How well service is provided –How convenient service is –How well benefits are explained Value depends on all elements of marketing mix.

8. Pricing Consider value to consumer Set price to provide value Cost affects pricing primarily as it affects value Noncost factors equally important

9. Demand Quantity that consumers will buy at a given price Different from need Can be affected by marketing mix Is a function of price

10. Demand Curves inelastic elastic

11. Price Elasticity of Demand % by which quantity demanded changes when there is a 1% change in price Elastic – greater than 1% change in quantity Inelastic – less than 1% change in quantity Price elasticity of demand = consumer sensitivity to price

12. Consumers more sensitive to price when Cost of product is large part of total cost Minimal differences among products - Consumer can judge quality - Comparisons are easy to make Switching costs are small

13. Competition Prices must be in line Distinct advantage That consumer recognizes and values Reference prices

14. Pharmacy Image Price consistent with image Consumers choose based on perceptions

15. Price as a Signal of Quality High price = high quality When hard to judge quality When quality is variable and risk high

16. Pharmacy Goals Maximize long-run profit Increase sales or market share – penetration pricing Increase sales of other products – loss leader pricing Attract only customers willing to pay for better service – price skimming Maintain status quo – match competitors prices

17. Nonmonetary Costs Time costs Search costs Psychic costs

18. Demand Backward Pricing 3 rd party payers cover 85+% of Rxs. 3 rd party payers set prices. Pharmacys goal is to profitably provide services at given price.

19. Suggested Pricing Strategy 1.Estimate demand 2.Calculate full service cost (SC) 3.Determine avg. net income (NI) – consider goals 4.Set price = SC + avg. NI + product cost 5.Compare demand and price – re-evaluate if necessary 6.Consider competitors responses 7.Implement price 8.Monitor patient and competitor response 9.Re-evaluate price periodically

20. Estimated Demand for Diabetic Counseling PriceQuantity Demanded $201,000 $25 750 $35 500 $45 250

21. Service Cost for Diabetic Counseling Volume Service Cost 1,000$25 750$33 500$49 250$98

22. Estimate Net Income $15,000 in assets for DCC Want a 12% ROA $15,000 x 0.12 = $1,800 Need $1,800 in annual profit to get 12% return At volume of 500 sessions, average profit = 1,800/500 = $3.60 Assumes goal of long-run profit

23. Set Price Volume SC Avg. NIPCPrice 1,000$251.800$26.80 750$332.400$35.40 500$493.600$52.60 250$987.200105.20

24. Compare Volume PriceDemand Assumedat that price 1,000$26.80< 750 750$35.40 500 500$52.60< 250 250105.20<< 250

25. Re-evaluate Problem: prices will not generate enough demand Solutions – Cut costs – Increase demand – Do not offer service

26. Pricing Strategy 1. Consider competitors responses – re- evaluate as needed 2. Implement price 3. Monitor patient and competitor response – re-evaluate as needed 4. Re-evaluate price periodically

27. Pricing Strategy Set profit margins based on product demand Focuses on consumer perceptions 1. Market priced – charge low margin - 10-25 Rxs / 30% volume 2. Staple – charge avg. margin - 75 Rx products / 25% volume 3.Premium – charge high margin - the rest of products

28. Pricing Strategy Consistent with focus on ROA ROA = NI/Sales x Sales/Assets NI/Sales measures profit per unit Sales/assets measures turnover or speed of sales So, you increase return by ?