4 Key Pricing Strategies for Life Sciences. All companies, including those in the life science industry, are constantly faced with the challenge of setting a price. The price that will be set is not only profitable but also has to be sustainable. Pricing low could result in losing out on significant revenues while high pricing could lead to buyers’ abandonment and physicians’ complaints.
Sometimes, opting for premium pricing for a product that has cheaper substitutes could drastically cut market acceptance and penetration of the new product. However, setting the right price could result in a significant acceptance from buyers and healthcare providers, which in turn leads to a substantial market share.
There are several pricing strategies a company can employ depending on the product type, company’s objectives, market, and the competition. But in this article, I’ll be addressing the four main pricing strategies.
In cost-based pricing, the cost of every single expense incurred to manufacture a product and bring it to market is summed up with a suitable profit on top.
Usually, sales, marketing, distribution, packaging, manufacturing, research, and development costs are calculated to set the price. The profit margin added is typically based on the company’s target or objectives or the acceptable price range for that product type and market.
In the pharmaceutical industry, cost-based pricing is often avoided by most companies, and the reason is this: Spreading the cost of distribution, manufacturing, packaging, and even that of R&D on each product will give an unprofitable and unsustainable lower price.
The cost-based pricing structure is most times used for medical equipment, occasionally for diagnostics, but never for drugs (even the generic ones).
Simply put, value-based pricing involves pricing based on consumers’ estimated or perceived value of a product or service. Many life science companies look at value-based pricing in 2 ways:
The first method consists of knowing a product’s perceived value by important stakeholders and also the extent to which a premium pricing can be applied.
Comprehensive market research of buyers, patients, and healthcare providers is critical to understanding the estimated value of a product and the barriers that would need to be overcome.
The second method, applicable only to pharmaceutical companies, involves the use of pharmacoeconomic data. The objective of this technique is to calculate the potential cost-savings of a product to the present management of a disease so as to squeeze out an acceptable and possibly premium price.
It’s pretty hard to imagine anyone pricing a product without considering their competitors. Competitor-based pricing is rarely used alone. It’s typically considered alongside value-based pricing.
When testing a new product’s perceived value, the potential benefits are compared to those of the current competitors. Then that perceived value is employed to set a price for the product.
But there’s a challenge with this kind of pricing. Notwithstanding the strength of the data, a breakthrough product carrying a premium price may still encounter restrictions from buyers who may choose a lesser, existing product because of price.
So companies are faced with these two choices: The first is, should they price products based on the perceived value and encounter possible roadblocks to easy access? And the second is, should pricing be closer to that of the main competitor to avoid potential restrictions?
There are advantages to following either of the two strategies, but the second choice isn’t advisable if the main rival is generic.
Skimming pricing entails maximizing margins in order to extract as much gain as possible. But this strategy can only be used for products that lack a strong competitor or has no competitor at all.
This pricing structure works best in a small market where product volume will be tightly controlled or limited. In a large market, the huge volume the product may command can be a problem and push back from buyers may occur.
Every company hopes to have a breakthrough product with limited or zero competition, but this can be both a blessing and a curse. The ensuing challenge will now be finding a way to maximize price and, at the same time, minimizing product volume in the market.
4 Key Pricing Strategies for Life Sciences