Pricing Strategies in Pharmaceutical Marketing

Pharmaceutical products can be classified under two main categories: Prescription products and OTC products. The criterion for division is whether a product is marketed to the medical profession or directly to the consumers. Price is one of the most interesting and controversial topics in pharmaceutical marketing. The responsibility for allowing a particular price lies with the regulatory bodies. Because of the particular characteristics of the pharmaceutical industry, the different approaches actually applicable and practiced in the industry as Cost-Plus Pricing, Break-Even Pricing, Value Based Pricing, Competition Based Pricing, & Economy Pricing. 

The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service. Internal factors affecting pricing include the company’s marketing objectives, marketing mix strategy, costs, and organizational considerations. External factors that affect pricing decisions include the nature of the market and demand, competition, and other environmental elements. Besides that, a company may amortize its R&D cost over a period of time, which becomes an additional cost component. Generally, a gross margin of 60% and above is considered to be reasonably good in the pharmaceutical industry.

Marketing is, as in other industries the driving force in the pharmaceutical industry. Most of the people engaged in marketing activities in the pharmaceutical industry are business graduates, with majors in marketing. However, the biggest problem they face, and which in turn becomes a challenge for the human resource function of the company is the distinct character of pharmaceutical marketing. What these business graduates learn at school does not encompass these unique characteristics and as a result, they find themselves inadequately equipped to handle the dynamics of pharmaceutical marketing.

Definition of Price

The amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the product or service.

Factors to Consider When Setting Price

A. Internal Factors Affecting Pricing Decision

Internal factors affecting pricing include 

1. Company’s marketing objectives
2. Marketing mix strategy
3. Costs
4. Organizational considerations.

B. External Factors Affecting Pricing Decision

External factors that affect pricing decisions include 

1. The nature of the market and demand
2. Competition
3. Other environmental elements

General Pricing Approaches

1. Cost-Plus Pricing

Adding a standard markup to the cost of the product.

2. Break-even Pricing (Target Profit Pricing)

Setting price to break even on the costs of making and marketing a product, or setting price to make a target profit.

3. Value-based Pricing

Setting prices based on buyers’ perceptions of value rather than on the seller’s cost.

4. Value Pricing

Offering just the right combination of quality and good service at a fair price.

5. Competition-based Pricing

Setting prices based on the price that competitors charge for similar products.

New-Product Pricing Strategies

1. Market Skimming Pricing

Setting a high price for a new product to skin maximum revenues layer by layer from the segments willing to pay the high price; the company makes fewer but more profitable sales.

2. Market Penetration Pricing

Setting a low price for a new product in order to attract a large number of buyers and a large market share.

Product Mix Pricing Strategies

1. Product Line Pricing

Setting the price steps between various products in a product line based on cost differences between the products, customer evaluations of different features, and competitors’ prices.

2. Optional Products Pricing

The pricing of optional or accessory products along with the main product.

3. Captive Product Pricing

Setting a price for products that must be used along with a main product, such as blades for a razor and film for a camera.

4. By Product Pricing

Setting a price for by-products in order to make the main product’s price more competitive.

5. Product Bundle Pricing

Combining several products and offering the bundle at a reduced price.

Price Adjustment Strategies

1. Discount and Allowance Pricing

Cash Discount: A price reduction for buyers who pay their bills promptly.

Quantity Discount: A price reduction for buyers who buy large volumes.

2. Segmented Pricing

Selling a product or service at two or more prices, where the difference in prices is not based on differences in costs.

3. Psychological Pricing

A pricing approach that considers the psychology of prices and not simply the economics; the price is used to say something about the product.

4. Reference Prices

Prices that buyers carry in their minds and refer to when they look at a given product.

5. Promotional Pricing

Temporarily pricing products below the list price, and sometimes even below cost, to increase short-run sales.

Discussion

Price is one of the most interesting and controversial topics in pharmaceutical marketing. The responsibility for allowing a particular price lies with the regulatory bodies. The objective of regulatory bodies is two-pronged; they have to on one hand ensure the protection of patients’ rights and provision of quality healthcare to the masses, and on the other hand, allow companies to make a reasonable profit so that they keep manufacturing the medicines needed for the people.

The process of pricing at the company level goes through the same steps as it goes in the case of any other product, but the matter becomes totally different when an application is lodged with the regulatory bodies to allow a price.

Cost Structure in Pharmaceutical Products

1. Cost of Active Ingredient

Usually the highest cost component. In most cases, it ranges between 10-30% of the total cost of the product.

2. Cost of Other Ingredients

A minor element, usually not higher than 3% of the total cost.

3. Cost of Packaging Material

Varies according to the material being used. In absolute terms, cost of packaging material ranges between Rs. 5-10 per pack of 10 tablets/capsules, per 60 ml bottle of liquid, per 5 ml injection & per 50 grams tube of ointments.

4. Cost of Manufacturing

Depends on the volume being manufactured in a factory. Besides that, a company may amortize its R&D cost over a period of time, which becomes an additional cost component. Generally, a 60% and above gross margin is considered to be reasonably good in the pharmaceutical industry. However, in the case of a new research molecule, the margin may be as high as 500-1000%.

ALSO READ: Calculation of Profit Margin, Net Rates, Trade Rates, and Price List in the Pharma Franchise

Pricing Structure in Pharmaceutical Products

Assuming a retail price of Rs. 100/-, following will be the price structure:

Retail Price: 100.00

Less: Retailer’s margin@ 15% 15.00

Trade Price: 85.00

Less: Distributor’s margin@ 10% 8.50

Ex-Factory Price 76.50

General Pricing Approaches

In view of the peculiar characteristics of the pharmaceutical industry, we will try to discuss the different approaches actually applicable and practiced in the industry. Although, the approaches are the same as in the case of any other product, but the reasons and implications are different.

Cost Plus Pricing

The required profit margin is added to the cost of the product to arrive at the Ex-factory price, and then Trade Price and Market Retail Price. This type of pricing is usually done for old molecules where the market is very crowded, and a higher price cannot fetch the required market share. The objective of the company in such a scenario is to either get some additional volume for their manufacturing facility or to complement their existing product range.

Break Even Pricing

Normally adopted for products being manufactured for government tenders and institutional business. The concern is not profit, but again either to get volumes or to get into large hospital pharmacies so that the positive impact may come from the out-of-hospital practice of the doctors who have to prescribe their brand in hospitals because of inclusion in pharmacy. Normally, this type of pricing policy is never adopted for research-based high-profile molecules, so that there may not be a negative impact on their high in-market price.

Value-Based Pricing

This approach for pricing is most commonly used by Multinational companies, en-cashing their good rapport with the doctors, especially in the case of new molecules. There are countless examples where the cost of the product has no

relevance whatsoever and the company has priced a product as per the perceived value for the doctors in their opinion.

However, things are becoming difficult now, and companies must be very careful while adopting this approach. They have to not only be careful about the wrong judgment of perceived value that they may make, and also the possibility of the launch of the same molecule by a local company with a good reputation and quality. 

During the last few years, MNCs have for the first time started to experience this onslaught by good local companies and now they realize that they cannot have their own way about pricing the product. Since China & India have emerged as major producers of bulk drugs, the prices of raw materials have calmed down drastically, and so the pressure has increased on MNCs due to launch low-priced brands of the same molecules by local companies.

Competition Based Pricing

This is what most marketing-oriented companies attempt to do these days. They take into account not only the perceived value, but also the value being offered by the competition, and then arrive at a reasonable price giving them a good margin as well as keeping them competitive in the long run. It is extremely important not only to take into account current competitors but also expected competitors, which come with a much lower price and snatch the market share.

Special Topics in Pharmaceutical Pricing

There is another pricing strategy practiced in the pharmaceutical market, which can be termed as Economy Pricing. The concept is close to cost-plus pricing, but the perspective is different:

1. Economy Pricing

There are some companies, which focus only on offering brands of established molecules at the lowest possible price. They base their price on cost, and keep the margins to bare minimum. The reason this is being discussed separately is that the molecules selected have no impact whatsoever on the pricing strategy. They may even pick up a molecule where there is just one leading brand, and price theirs’ at 75% lower price. 

2. Price Determination by Regulatory Authorities

It would be interesting to assess how the Ministry of Health decides upon the price. What they do is that they ask for the cost structure from the first applicant of any molecule, which is in 99% of cases a multinational company, which provides a highly inflated cost due to the element of transfer pricing. On the basis of this cost structure, the price is determined.

The next applicant gets approximately 25-40% lower price, and this then becomes the reference price for all following applicants. Since the price allowed to MNC was inflated, all local companies get sufficient margins even at 40% lower price than the leader. It is just mind-boggling to see such approach, as it can be very simple for government officials to verify costs from neutral sources and find out a reasonable price.

What is Transfer Pricing?

Unlike consumer products, services and consumer durables, pharmaceutical companies are not allowed to use the mass media for advertising their products. This closes a very important expense center for them, which is traditionally used by all other industries to reduce their profits and show a higher cost in order to evade taxes and paying dividends to the shareholders. Besides this, there is a strict code of ethics applicable which refrains them from spending beyond a certain limit on promoting their products.

In this situation, the only area available for manipulation of cost is the actual cost of product. Companies aim to make the cost appear as high as possible by buying the raw material at an inflated price, in most of the cases from their own parent companies. This phenomenon is termed as transfer pricing, the reasons for which will be discussed the following section.

Why MNC's indulge into Transfer Pricing?

As the first step, we need to understand a little about the costing and pricing structure of the industry. The cost structure in the pharmaceutical industry goes somewhat as follows:

Cost of Active Raw Material (Drug itself) + Cost of excipients (Material used to give the medicine a particular form like tablets, syrups etc.) + Applicable duties on import of material (Approximately 20% all-inclusive) + Cost of labor and other overheads + Packaging Material = In-Factory Cost of Product.

In the whole of the above structure, all heads except for raw material are almost consistent for all products and do not allow much room for manipulation. Raw materials, however, form the basic chunk of the cost structure, and this is where there is much room for engineering. 

Conclusion

In view of the particular characteristics of the pharmaceutical industry, the different approaches actually applicable and practiced in the industry as Cost-Plus Pricing, Break-Even Pricing, Value Based Pricing, Competition Based Pricing, & Economy Pricing. The controls maintained by regulatory bodies leaves very little room for maneuvering and even lesser for making an error. In view of the limited time and scope of this study, the focus will be the price and Pricing strategies for Pharmaceutical Products. This study covers the Pricing considerations and approaches. 

This attempt made possible pricing approaches and strategies for pharmaceutical products. The amount of money charged for a product or service, or the sum of the values consumers exchange for the benefits of having or using the product or service. Internal factors affecting pricing include the company’s marketing objectives, marketing mix strategy, costs, and organizational considerations. External factors that affect pricing decisions include the nature of the market and demand, competition, and other environmental elements.

Besides that, a company may amortize its R&D cost over a period of time, which becomes an additional cost component. Generally, a gross margin of 60% and above is considered to be reasonably good in the pharmaceutical industry.

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