Pharmaceuticals

Pricing in a Choice-predominant Situation

What is the meaning of price in a Choice-predominant Situation?

At least in non-price-controlled countries, price is nothing more than a reflection of the value of a product as perceived by the customers. Price and perceived value should be in balance.

Steps in price setting

If reimbursement and/or formulary listing is not an issue, only decision behavior of physicians has to be considered. Therefore, we approach the problem of price setting in the following manner:

• Large-scale interviews are conducted using computer-aided questionnaires and applying the Conjoint Measurement technique (ACA/CBC/Discrete Choice Modeling). These techniques permit thorough analysis of all factors relevant to determining the product's value, including the price.
• The price response function is calculated based on the market simulation model in the PRICESTRAT system, which is especially designed for the pharmaceutical market.
• The gross margin function is determined by including the marginal costs in the price response function.
• Simulation workshops are used to analyze the impact of various scenarios on the optimal price.

Example: pricing a new drug

An optimal price was to be established for a new drug which had only marginal advantages over its competitors. From the physicians' point of view, almost all drugs in this market were interchangeable. Therefore, price became the important differentiation factor.

Result

The optimal price, reflecting the perceived utility of the drug, was calculated at $0.83/day (ex manufacturer price) and the expected gross margin at approximately $130 million. It was clear that a deviation from this optimal price would result in decreasing profits.