[7] 6137 - Price Mix

Pricing

• critical element of the marketing mix that directly affects the company’s profitable and competitive positioning

• Effective pricing decisions require understanding both market dynamics and customer’s perception of the value of the product

PRICE

• communicates the intended value positioning of a product or brand to the market.

• Provision of value to the product 

• the element of the marketing mix that produces revenue; and the easiest to adjust.

 PRICE

• Remember: a well-designed product can

communicate a price that can merit premiums which later on pays back the company.

Note: In the Philippines, life-saving drug products are under

Price control by the government. Prices of these affected products cannot be controlled by the manufacturer and/or the drugstore (above the mandated price).

MAXIMUM DRUG RETAIL PRICE (MDRP) IN THE PHILIPPINES

• The highest amount a retailer may charge to a consumer for a medicine placed under price regulation.

• Prices of medicines were reduced at a median of 40% from current retail prices. Reductions were up to as much as 93%. 

No medicine under price regulation shall be

sold to a customer at a price higher than the MDRP.

On top of the MDRP, senior citizens and persons-with- disability (PWDs) are

still eligible to avail of special discounts.

MAXIMUM DRUG RETAIL PRICE (MDRP) IN THE PHILIPPINES

• Violation Penalty:

• Php 50,000 to Php 5,000,000 as stipulated under Republic Act No. 9502 or the Cheaper Medicines Act.

EO 821 s. 2009

• key policy on drug price regulation

• named as “Prescribing the Maximum Drug Retail Prices for Selected Drugs and Medicines that Address Diseases that account for the Leading Causes of Morbidity and Mortality"

EO 821 s. 2009

• main purpose

• make medicine more affordable & accessible

• address diseases that are the leading causes of mortality and morbidity 

• prevent financial burden on Filipino families due to high drug cost

EO 821 s. 2009

• Main provision:

• set price ceiling for specific essential medicine applied to drugstore, hospital pharmacy, HMO and other retail outlets

• NO SELLER can charge above the MDRP 

CRITERIA FOR DETERMINING MDRP

• public health priorities

• high price differentials compared to international prices.

• limited competition or lack of generic counterparts 

• expensive and commonly prescribed drugs

NOTE: DRUGS THAT WERE PRICE-CONTROLLED

• can also be removed by the government from having the MDRP. 

• Drugs may be removed from the list if competition increases and the price becomes naturally affordable.

PRICING CONCEPTS

1. Reference Prices

2. Price-Quality Inferences

3. Price Endings

Reference Prices

• comparing an observed price to an internal reference price they remember or an external frame of reference such as a posted “regular retail price”.

Fair Price

• price based on customer feelings

• Consumers feel that the price is reasonable/ justifiable based on perception/ experience on the product

Typical Price

• usual price of a product in the market (Ex. suggested-retail price or SRP)

• usually guide consumers about the expected amount/price of the product in the market

• From the SRP, resellers / sari-sari store can set their markup

Upper-Bound Price

• maximum price that consumers would pay; also called reservation price

• Maximum budget; above that price will discourage you to buy the product

Lower-Bound Price

• minimum price that consumers would pay; also called lower threshold price

• Perceived minimum price that is still reasonable and you will trust the product 

• Too cheap = reduced trust on the product

Price-Quality Inference

• price is used as an indicator of a product’s quality.

• Usually happens when a consumer assumes that when a product is expensive, it means that it is high quality

• Consumers use price as signal of quality, especially when they cannot easily evaluate the product

Price Endings

• based on consumer psychology where price is determined based on the numerical structure of a product’s price.

• Last digit of the pricing influence perception

• Any small numerical difference can make a big difference on the perception

Price endings

LIMITATIONS

1. Only useful when consumer knowledge is poor 

2. Not usually effective for items that are not bought frequently 

3. Not usually effective if product design changes frequently

PRICE SETTING

1. Selecting the Pricing Objective

2. Determining Demand

3. Estimating Costs

4. Analyzing Competitors’ Costs, Prices, and Offers

5. Selecting a Pricing Method

6. Selecting the Final Price

Selecting the Pricing Objective

• The company first decides where it wants to position its market offering. The clearer a firm’s objectives, the easier it is to set price.

Survival

• intense competition, changing market wants, overcapacity (just enough to cover fixed costs and some variable costs).

• Strategy is to set the price really low; just enough to cover the fixed cost and some variable cost

Maximum Current Profit

• maximum profit based on demand and cost estimation.

• Maximizing the short-term profit 

• Estimate demand and cost and choose the price that will give the highest immediate return

Maximum Market Share

• setting a lower price to capture/penetrate most of the market (if market is price sensitive). 

• e.g., Market-penetration pricing

• Set low price to capture largest number of consumer

Market Skimming

• price starts very high and goes down slowly over time (only if product communicates premium quality).

• Maximize revenue from high end or early adopters; start with high price then lower it later 

• for early high return of investments

Product-Quality Leadership

• best-in-class quality products can set the highest price

• Position product as best in the class; consistently give high price and emphasize  quality, trust, and brand

• price will not decrease

• maintains high price as it is considered to be a premium product

Determining Demand

• refers to how much consumers are willing and able to pay at in price levels

• Price and demand normally has an inverse relationship. Higher price means demand becomes lower; and vice versa.

• Some consumers may perceive that a product has a high quality if the price is high.

PRICE SENSITIVITY

• refers to how much demand changes when price changes

• elastic demand

• pertains to the reaction of a market to changes in price

If a product price increases and demand goes down,

it means the market is price sensitive.

price insensitive

– inelastic demand

• price increase = little change in demand

• product is needed, which is why it is purchased consistently

REMEMBER: CUSTOMERS TEND TO BE LESS PRICE-SENSITIVE WHEN

1. The product has no or few competitors.

2. They are slow to change their buying habits.

3. They think the price increase is justified.

4. Price increase is too small to notice.

The product has no or few competitors.

due to limited alternatives available,consumers have no choice and will continue to purchase it

They are slow to change their buying habits.

• consumers may tend to be loyal to a particular brand or it became their habit

• e.g., patients consistently buy a specific brand, such as biogesic (“nakasanayan”)

They think the price increase is justified.

consumers understand the reason for price increase (may be due to inflation, better formulation, or war in Middle East)

awareness reduces resistance

Price increase is too small to notice.

e.g., Php 50 → Php 52 may not significantly affect the demand

 Estimating Costs

• A company must be fully aware of the costs related to the production and delivery of a product and all other associated costs of keeping the business open. 

  • costs directly affect profitability and help determine the minimum acceptable price

• A company will not only spend on manufacturing but also needs to pay other expenses which will reduce revenue and determine final profitability.

profit zone

– price must fall between the floor and ceiling costs

IN SETTING PRICES

• demand

• sets the maximum (Ceiling price)

• price above ceiling price – we lose demand

• market could accept

IN SETTING PRICES

• costs

• sets the minimum (Floor price)

• avoid losses

• price below floor price - we lose profit

• lowest price that could cover all the costs

Fixed costs

• also called as overhead are costs that remain constant in producing a product 

e.g., Rent, salary of permanent employees, utilities

Variable costs

• change depending on production output 

• more production = higher cost = more raw materials

• e.g.,. Raw material and packaging material costs, electricity

When production costs becomes unbearable for the manufacturer, the first instinct is to increase the price and let the customer bear the price increase (for maintenance of profitability).

However, increasing the price of a product should always be the last resort of any business as it may reduce demand and competitiveness, especially in a regulated market like the pharmaceutical market. Instead, there are other strategies that can be considered:

WAYS TO AVOID PRICE INCREASE

Decreasing the amount of product per usual price

Using cheaper raw and packaging materials

Removing product features

Removing existing variants of a brand

Offering cheaper, less premium products

Decreasing the amount of product per usual price

• not applicable for pharmaceutical products as the quantity is usually fixed.

  • due to safety and regulatory standards

• e.g., decreasing the amount of product while keeping the same price (smaller packaging size at the same price)

Using cheaper raw and packaging materials

• might affect quality, performance, stability, and efficacy of the product.

• lower production costs (e.g., alternative excipients)

Removing product features

• offering a base product (removing extended release feature, removing chewable feature).

• simplifying the product 

• lower production cost, reduced convenience or functionality

Removing existing variants of a brand

• savings from less promotions, focus on just one variant.

• limit the number of production version to reduce cost

• focusing on one form

• discontinue less popular strength or dosage form = save manufacturing, marketing, and distribution costs

Offering cheaper, less premium products

• “economy brands”, cheaper brands from the same manufacturer.

• introducing a more affordable version of the product

• a company may launch both the premium brand and the economy brand; therefore, this would capture the price sensitive market segment without lowering the quality of the premium brand price

Analyzing Competitors’ Costs, Prices, and Offers

Pricing our products does not solely depends on internal considerations, but also external circumstances such as how our competitors establish their own pricing structures.

Analyzing Competitors’ Costs, Prices, and Offers

• remember

• the way how our competitors set their prices can directly affect the demand for our products.

  • competitors lower their prices = product may lose demand unless we respond to it

  • competitors increase their prices; your product has a lower price = more attracted to price sensitive consumers

CONSIDER THE FOLLOWING QUESTIONS WHEN CONSIDERING EXTERNAL PRICING FACTORS

Why did the competitor change the price?

Does the competitor plan to make the price change temporary or permanent?

Will the demand for our products be affected?

What would be the reaction of other players?

Why did the competitor change the price?

• To steal the market, to utilize excess capacity, to meet changing cost conditions, or to lead an industry-wide price change?

• Is it to gain more market share? Would it be about responding to cost changes? Would this lead to or influence industry pricing?

Does the competitor plan to make the price change temporary or permanent?

• Temporary: Is it due to promotion or sale? Do we need to react strongly? 

• Permanent: Would it be requiring a strategic pricing adjustment on our end?

Will the demand for our products be affected?

• if competitors offer lower price or better value, the demand of the product may decrease

• if a product has a strong brand or differentiation, it can impact demand; however, if the product is really good as well as its brand differentiation, that impact tends to be minimal

• So, what will competitors do? Will they also lower the price? Would there be a price war? Will they maintain their price? Will they reposition their product? 

What would be the reaction of other players?

• To respond or to stay the same

Selecting a Pricing Method

• In Pharmaceutical Marketing, there are three general methods in setting price that is mainly based on the costs you incur in manufacturing a particular drug product. Based on the costs incurred, the price is determined to give both the customer and the company value and business attractiveness,

4 GENERAL METHODS IN PRICING

1. Markup Pricing 

2. Target-Return Pricing 

3. Perceived Value Pricing 

4. Value Pricing

MARKUP PRICING

• most common

• a company puts a markup above the production cost (also called unit cost) to determine the price of a product. 

• start by determining the unit cost, and then apply the mark-up from that

• A markup is the amount added to the cost it took to make the product and is the source of a company’s profit.

 TARGET-RETURN PRICING

• set-up price to achieve a target return of investment (ROI)

• goal: ensure a desired level of profit based on the capital investment 

• how big is the ROI (e.g., 10% ROI, 15% ROI, or 20% ROI)

• price is driven by profit goals 

• The company decides on the price that would give back the target rate of return on investment.

PERCEIVED VALUE PRICING

• based on how much value consumers would perceive the product, not just the cost of the product 

• The company delivers its promised features and values and the customers perceive the value which justifies the price.

VALUE PRICING

• offer the lower price for a high level of quality or benefit

• providing value for the product

• A company optimizes its production system so well that it can produce a product so efficiently that it can offer it at a very low price (while high quality is maintained).

 Selecting the Final Price

• after choosing a pricing method, companies refine the final price by considering market and brand factors

• There are several factors that must be considered before selecting the final price of a product. While we can choose the pricing methods that suit our pricing objectives,

FACTORS IN SELECTING THE FINAL PRICE

1. Brands with average relative quality but high relative advertising budgets could charge premium prices.

2. Consumers were willing to pay higher prices for known rather than for unknown products. 

3. Brands with high relative quality and high relative advertising obtained the highest prices. 

4. Conversely, brands with low quality and low advertising charged the lowest prices.

Price Adaptation Strategies

• after choosing a base pricing approach, companies adjust the price using adaptation strategies to match different market conditions, customer segment, and business goals

• In selecting the final price, companies usually adhere to an established pricing structure to guide long-term pricing objectives

GEOGRAPHICAL PRICING

•  the company decides how to price its products to different customers in different locations and countries. 

• Should the company charge higher prices to distant customers to cover the higher shipping costs, or a lower price to win additional business? 

• How should it account for exchange rates and the strength of different currencies? Remember: your estimated is computed based on your local currency. If you export to a different country, exchange rates will affect your profit.

 PRICE DISCOUNTS (TRADE)

• reduction from the listed price to encourage faster payment, large purchase, or support business operation

• can be in the form of cash discount or discount for prompt payment

• a reduction in price given to buyers who pay within a specified time encourage quick payment and improve sellers’ cash flow

Discount

• for buyers who pay promptly

• e.g., 2% discount is given if a drugstore pays its orders within 30 days to the distributor

Quantity Discount

• for buyers who buy more (large volumes).

• encouraging bulk buying

• helps reduce the inventory and logistic cost

• e.g., 10% discount for 10,000 units; 2% discount for less than 10,000 units

Functional Discount

• AKA trade discount

offered to a buyer (drugstore or distributor) that also performs a specific function

Seasonal Discount

• given for products that are outside peak season or not in high demand during a specific season

• help move inventory when the demand is [unintelligible]

• encourage sale during slow period

 PROMOTIONAL PRICING

• temporary pricing strategies that are used to boost the sale or attract consumer

Loss-leader pricing

• offering a well-known brand at a cheaper price to stimulate customer traffic

• goal: bring customers into the store, where they may try other items

• common in retail and in pharmacy

Special customer pricing

• offering special prices to “club” members. 

• often used to reward loyal customers or members

• help customers’ retention and loyalty

Psychological pricing

• offering a usually high-priced product at a very low price 

• usually done for near-expiry products that are still within acceptable shelf life

• pricing products in a way that influence how customers perceive value

• prices are set to appear as a good deal or affordable

DIFFERENTIATED PRICING

• AKA segmented pricing

• charging different prices for the same product based on the type of consumer, time of purchase, quantity of usage, and usage of the product

• price adjustment to accommodate differences in products, customers, and location.

Price discrimination

- occurs when a company sells a product or service at two or more prices that do not reflect a proportional difference in costs.

Customer-segment pricing

• offering the same product but at different prices to different customer segment 

• different groups receive different pricing based on policies or regulations

Product-form pricing

• offering same product at different prices as different dosage forms or formulations

• this may be due to packaging, perceived value, or utilizations of the product

Channel pricing

offering the same product at different price based on channel or location