Healthcare Pricing SLP4
Healthcare Pricing SLP4
Pharmaceutical products fall into either the prescription or over-the-counter (OTC) categories. The basis for the categorization is whether a company markets them directly to consumers or medical practitioners. The adoption of a pricing is among the most interesting and contentious issues in the marketing of these products. Although regulatory agencies have the responsibility of allowing certain prices, pharmaceutical companies must consider different factors in the adoption of pricing strategies such as costs, marketing mix strategy, marketing objectives, and internal factors. Also, various external factors such as competitors, and the dynamics of demand and supply influence pricing decisions. The essay will focus on the pricing strategy that United Healthcare Group (UHG) will utilize in the launch of a new cholesterol-lowering generic drug.
The development of a pricing strategy by a pharmaceutical company requires decision-makers to consider the impact on a variety of stakeholders. According to Danzon, Towse, and Mestre-Ferrandiz, after a drug marketer has resolved any clinical issues about a new drug, it is important to address concerns associated with parties who develop and control formularies. Also, an effective pricing strategy must take into consideration payer experience and the ability to work in an innovative way with manufacturers. It is necessary to balance cost issues with patient outcomes in place of the traditional silo thinking, which focused primarily on drug costs and not the overall healthcare costs. Besides, insurance plan administrators have a better understanding of pharmacoeconomic information such as cost-benefit and comparative-effectiveness research, which is useful in making decisions regarding formularies, in particular for drugs that are frequently used or involve high costs. Consequently, a pharmaceutical marketer must determine what payers perceive as valuable evidence.
Pharmaceutical marketers have various pricing strategies at their disposal, which they can utilize to achieve their unique marketing objectives. Stabile, et al., state that choosing a strategy depends on the specific goals that a pharmaceutical company has regarding market share, revenue, product position, and profits, and the kind of product such as its similarity or innovativeness. UHG is introducing a drug that is structurally similar to others in the market but wishes to correct the bad connotation associated with cholesterol-lowering drugs. It expects that the launch of its product will enhance competition in the industry and drive existing prices downwards. Since the company is entering a crowded market, the most appropriate approach is the penetration pricing strategy.
By using penetration pricing, the company will establish a low introductory price with the intention of capturing a greater market share. Komfield, Donohue, Berndt, and Alexander, state that the strategy will be appropriate as UHG will attract new customers and build customer loyalty. The effective use of penetration pricing will require the pharmaceutical company to mass-produce the new drug to ensure that it achieve the lowest cost per unit possible. However, the company should be prepared to respond to actions by competitors to reduce existing prices; thus, it must be prepared to absorb losses that may arise. Consequently, the company must have sufficient reserve funds to ensure that the production of the new drug is not interrupted.
To penetrate the cholesterol drugs market, the drug manufacturer will price the product at a low price P and will project a certain sales volume A. Therefore, the companys expected revenue will be (P*A). The determination of the price P will be based on marginal costs and price elasticity. Price elasticity of the drug is a measure of the responsiveness of a market to a price change. The company anticipates that the drugs market is elastic, which implies that the quantity of demand for its pharmaceutical product will increase for a small decline in the price, which will significantly increase its revenue.
UHGs penetration pricing strategy will rely on low pricing, which will assist it to build a positive brand among the first customers. According to Stabile, et al., the customers will share their opinion with other customers and ultimately increase the companys market share, which will increase sales revenue and lower manufacturing costs. The loyal customers will purchase its product unless it is unavailable in some areas. However, the company should ensure that it implements its strategy in a proper way to avoid drawbacks such as false loyalty and customer dissatisfaction despite its profitability. Consequently, it needs to make sure that other competitors will not have the capacity to match their pricing or offer lower prices in future.
Formulation of the Pricing Strategy
The company will incur a significant economic cost in bringing the new cholesterol-lowering drug to the market. Danzon and Epstein, state that the company should consider the overall costs associated with innovation, manufacturing, and sales and marketing when determining the price. Nonetheless, the capacity of the company to recoup the costs is dependent on various economic factors. Consequently, UHG will consider factors such as patient-prescriber preferences, existing prices offered by competitors, and price elasticity, which is how price changes affect the demand for its products.
The company needs clear marketing objectives to execute the pricing strategy. The market penetration pricing strategy will allow the company to compete in a more effective manner on the price variable. Besides, the company can adopt marketing practices such as bundling and couponing to boost the chance of achieving its marketing goals. Apart from the marketing goals, the pricing strategy that the company selects should align with product positioning. Product bundling entails providing customers with several products as a combined product, which could be useful to the company by offering the option of related drugs that individuals with high cholesterol levels may require. Conversely, couponing aims at providing discounts to customers, which assists them to save money on drugs that they purchase frequently. The pharmaceutical company will strive to expand its market rapidly; thus, it will utilize wide-ranging promotions exercises such as consumer advertising to ensure that its product achieves a unique positioning.
The company will compete in a market that regulators or insurers control the use of generic medication. Therefore, its marketing mix decisions will vary from companies selling branded products. Ordinarily, when a physician selects a generic drug for a prescription, it is usually available from various manufacturers who compete for market share. Even though the doctors will make prescriptions, the pharmacy provider will determine the pharmaceutical manufacturer who will supply the drugs. Therefore, the company should focus its marketing initiatives on these providers.
The company can brand its generic product and make sales calls directly to physicians to encourage them to prescribe the drugs. Besides, it should identify other parties in the distribution channel who can influence supplier choices through wholesale sourcing and buyer groups programs to improve its sales volume. According to Komfield, Donohue, Berndt, and Alexander, the generic manufacturer can target reimbursement by striving to enter the cholesterol-lowering drugs market with a generic status that meets the price demands of users. It should identify a listing price, which is usually a Wholesale Average Cost (WAC) or Average Wholesale Price (AWP), which is about 90 percent of the list price of branded products.
The adoption and implementation of an effective pricing strategy by a pharmaceutical company is a complicated issue that necessitates comprehensive market intelligence. A company needs to understand the marketplace to balance innovation, profitability, and accessibility of medications by patients. Besides, the strategy must appeal to various needs of influential decision makers who determine the demand for pharmaceutical products such as insurers and regulatory bodies. UHG chose the penetration pricing strategy with the aim of providing its generic cholesterol-lowering drug at a lower price, which would appeal to customers, build their loyalty, and increase sales volume.