chapter 12 pricing pharmacist services based on carroll, n.v., pricing pharmaceutical products and...
TRANSCRIPT
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Chapter 12Pricing Pharmacist ServicesChapter 12Pricing Pharmacist Services
Based on Carroll, N.V., “Pricing Pharmaceutical Products and Services,” in Financial Management for Pharmacists: A Decision-Making Approach, Third Edition,” Baltimore: Lippincott Williams and Wilkins; 2007.
Norman V. Carroll, PhD
Professor of Pharmacy Administration
Virginia Commonwealth University School of Pharmacy
Chapter 12 slides for
Marketing for Pharmacists, 2nd edition
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Learning ObjectivesLearning Objectives
• Explain why pricing is an important part of marketing pharmacy products and services.
• Discuss how pricing relates to other elements of the marketing mix.
• List and discuss the effects of consumer-related factors, competition, pharmacy objectives, and costs on pricing decisions.
• Calculate the cost of providing a pharmacist service.
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Learning Objectives (continued)Learning Objectives (continued)
• Explain the relationships among price, cost, and demand for a pharmacist service.
• List and explain the steps involved in one strategy for pricing pharmacist services.
• List and explain methods of presenting service prices to consumers.
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PRICE = INGREDIENT COST + SERVICE COST + PROFIT
DISPENSING FEE
Components of price
Components of price
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Measures of Rx ingredient costMeasures of Rx ingredient cost
AAC -- Actual acquisition cost
AWP -- Average wholesale price
(it’s really not)
EAC -- Estimated acquisition cost
MAC -- Maximum allowable cost
-- multisource / generics
AMP -- Average manufacturer’s price
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Average per Rx profitAverage per Rx profit
• Based on required return on assets
• Ex: $100,000 in Rx-related assets
12% required ROA
60,000 Rxs per year
ROA = Net income / Assets
NI = 12% x $100,000 = $12,000
NI / Rx = $12,000/ 60,000 = $0.20
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PricingPricing
• Focus on value – what is product or service worth to consumer
• Value depends on– Consumer perceptions
– How well service is provided
– How convenient service is
– How well benefits are explained
• Value depends on all elements of marketing mix.
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PricingPricing
• Consider value to consumer
• Set price to provide value
• Cost affects pricing primarily as it affects value
• Noncost factors equally important
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DemandDemand
• Quantity that consumers will buy at a given price
• Different from need
• Can be affected by marketing mix
• Is a function of price
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Demand CurvesDemand Curves
inelastic
elastic
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Price Elasticity of DemandPrice Elasticity of Demand
• % by which quantity demanded changes when there is a 1% change in price
• Elastic – greater than 1% change in quantity
• Inelastic – less than 1% change in quantity
• Price elasticity of demand = consumer sensitivity to price
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Consumers more sensitive to price when Consumers more sensitive to price when
• Cost of product is large part of total cost
• Minimal differences among products
- Consumer can judge quality
- Comparisons are easy to make
• Switching costs are small
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CompetitionCompetition
• Prices must be in line
• Distinct advantage
• That consumer recognizes
and values
• Reference prices
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Pharmacy ImagePharmacy Image
• Price consistent with image
• Consumers choose based on perceptions
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Price as a Signal of QualityPrice as a Signal of Quality
• High price = high quality
• When hard to judge quality
• When quality is variable and risk high
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Pharmacy GoalsPharmacy Goals
• Maximize long-run profit
• Increase sales or market share – penetration pricing
• Increase sales of other products – loss leader pricing
• Attract only customers willing to pay for better service – price skimming
• Maintain status quo – match competitors’ prices
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Nonmonetary CostsNonmonetary Costs
• Time costs
• Search costs
• Psychic costs
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Demand Backward PricingDemand Backward Pricing
3rd party payers cover 85+% of Rxs.
3rd party payers set prices.
Pharmacy’s goal is to profitably provide services at given price.
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Suggested Pricing StrategySuggested Pricing Strategy
1. Estimate demand
2. Calculate full service cost (SC)
3. Determine avg. net income (NI) – consider goals
4. Set price = SC + avg. NI + product cost
5. Compare demand and price – re-evaluate if necessary
6. Consider competitors’ responses
7. Implement price
8. Monitor patient and competitor response
9. Re-evaluate price periodically
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Estimated Demand for Diabetic Counseling
Estimated Demand for Diabetic Counseling
PricePrice Quantity DemandedQuantity Demanded
$20 1,000
$25 750
$35 500
$45 250
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Service Cost for Diabetic Counseling
Service Cost for Diabetic Counseling
Volume Volume Service CostService Cost
1,000 $25
750 $33
500 $49
250 $98
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Estimate Net IncomeEstimate Net Income
• $15,000 in assets for DCC• Want a 12% ROA• $15,000 x 0.12 = $1,800• Need $1,800 in annual profit to get
12% return• At volume of 500 sessions,
average profit = 1,800/500 = $3.60• Assumes goal of long-run profit
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Set Price Set Price
Volume Volume SCSC Avg. NIAvg. NI PCPC PricePrice
1,000 $25 1.80 0 $26.80
750 $33 2.40 0 $35.40
500 $49 3.60 0 $52.60
250 $98 7.20 0 105.20
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Compare Compare
Volume Volume PricePrice DemandDemand
AssumedAssumed at that priceat that price
1,000 $26.80 < 750
750 $35.40 500
500 $52.60 < 250
250 105.20 << 250
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Re-evaluateRe-evaluate
• Problem: prices will not generate enough demand
• Solutions
– Cut costs
– Increase demand
– Do not offer service
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Pricing StrategyPricing Strategy
1. Consider competitors’ responses – re-evaluate as needed
2. Implement price
3. Monitor patient and competitor response – re-evaluate as needed
4. Re-evaluate price periodically
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Pricing StrategyPricing Strategy
• Set profit margins based on product demand
• Focuses on consumer perceptions
1. Market priced – charge low margin
- 10-25 Rxs / 30% volume
2. Staple – charge avg. margin
- 75 Rx products / 25% volume
3.Premium – charge high margin
- the rest of products
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Pricing StrategyPricing Strategy
• Consistent with focus on ROA
• ROA = NI/Sales x Sales/Assets
• NI/Sales measures profit per unit
• Sales/assets measures turnover or speed of sales
• So, you increase return by ?