Price

Price

"… cheapness is not a strong appeal. Americans are extravagant. They want bargains but not cheapness. They want to feel that they can afford to eat and have and wear the best…
… people judge largely by price. They are not experts. In the British National Gallery is a painting which is announced in the catalog to have cost $750,000. Most people at first pass it by at a glance. Then later they get farther on in the catalog and learn what the painting cost. They return then and surround it...

A high price creates resistance. It tends to limit one's field. The cost of getting an added profit may be more than the profit.
[Large total] profits are made on great volume at small profit per item. …
But on other lines high price is unimportant. … The maker must have a large margin because of small consumption. [Our opinion: Or vice versa.]
On other lines a higher price may even be an inducement. Such lines are judged largely by price. A product which costs more than the ordinary is considered above the ordinary"
- Hopkins (1923)

According to Lidstone (1987) pharmaceutical companies may use one or more of the following four methods before setting a price:

Cost-based pricing

The price can be calculated from the total of the cost of production and marketing costs, plus an allocation for overheads plus a target percentage for profit.

This is the method used in general marketing to price many goods and services. However, in the pharmaceutical industry it is often only used to indicate the minimum price. Nevertheless, this approch can be used to determine excessive prices by overstating the components (eg research costs).

Market demand-based pricing

The price can be calculated by estimating the balance between price and volume of sales (market penertation) that will maximize profit.

In "ideal" markets if the price is increased then the volume of sales will decrease. The extent to which this occurs in a real market is measured as the "price sensitivity". Poor people are much sensitive to prices than wealthy people. However price sensitivity for pharmaceuticals is generally much less than for other goods, especially when the pharmaceuticals are subsidised or are correctly or incorrectly believed to be essential.

With subsidies this approach will lead to prices which are out of the reach of the poor, who often need essential pharmaceuticals more than the wealthy.

With subsidies this approach may lead to excessive prices for the third party payer.

Companies may choose one of the following strategies:

High price and low volume (skimming) eg the Rolls Royce
Low prices and high volume (penetration pricing)
Medium prices and medium market share

Competition-based pricing

Prices can be set above, below or at the same level as the competition.

If a company and/or the market believes that the Product or the Promotion are superior to the competition then the company may set a price above the competition even if production costs are lower. If a product has no advantages it may be given an advantage by giving it a lower price. This is important for generic drugs.

Perception-based pricing

Prices can be set according to the "perceived value" of the product.

The perceived value can be increased by improving the Product or by using better Promotion.

For example:

"Glaxo obtained a highre price for Zantac compared with Tagamet, which was the first and the market leader. The high price for Zantac was justified in thedoctors' mind by a "prestige" campaign, which successfully differentiated the two products and postitioned Zantac as a "Super-Tagamet"."
- Lidstone (1987)

Lidstone J, Collier T. Marketing Planning for the Pharmaceutical Industry. Aldershot UK, Gower 1987