Question

Topic: Strategy

Pricing Strategy - Segmentation

Posted by Anonymous on 6/14/2017 at 9:32 AM ET 250 Points
We have the following situation: A drug manufacturer sells a new drug and wants to price it. We know that the customers are hospitals who use that drug for surgeries. Since the Hospital do not receive more money for complications, the hospital is seeking to leverage the less risky drug. We know that the new drug has less risk than the drug from the competition, and the economic value is 2 dollar more. Since the competitions product is priced 4 dollar, we can price it for 6 dollar.

Furthermore, we can segment our customers between low risk customers and high risk customers. It turns out that our drug is even more effective in the high risk customer segment, so that the economic value here is 14 dollars (10 dollar more than the competitions drug).

Since there are 800.000 low risk customers and 200.00 high risk customers, we arrive to much higher revenues and profits if we calculate 2 dollars production costs.

My question: Is it the better strategy to just focus on high risk customers or should the company price the same product for two different prices? How would this be possible in this case?
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RESPONSES

  • Posted by Peter (henna gaijin) on 6/14/2017 at 11:21 AM Member
    Don't have the cost to produce the drug and to sell the drug, which would be useful to determine which was more profitable. So will focus on just which maxes the sales dollars.

    If you price at $6 and sell to both the 800k low risk and 200k high risk, you will have sales of $6 million.

    If you price at $14 and just sell to the 200k high risk, you will have sales of $2.8 million.
  • Posted on 6/14/2017 at 11:27 AM Author
    The products costs are 2 dollars.
  • Posted on 6/14/2017 at 11:56 AM Accepted
    Where are your customers/hospitals? It might be possible to engineer a two-tiered pricing strategy, but it isn't a simple solution. We've been involved in a similar situation (another industry, probably another geography), and could take a closer look to see if our approach would work.

    Contact me offline if you want to pursue. Use email address in my profile.
  • Posted by Jay Hamilton-Roth on 6/14/2017 at 7:48 PM Accepted
    Have you interviewed the decision makers in hospitals to understand their buy decision? That's where I'd start my research, rather than guessing who will buy how much at what price.
  • Posted by cookmarketing@gmail. on 6/14/2017 at 10:23 PM Accepted
    In USA, hospitals do not purchase drugs with a high risk vs low risk analysis. There first responsibility is to the patient....not the decision on drug costs.

    How does your country's hospitals approach the same patient responsibility?

    #2 Mr. Goodman is correct. You may have a two-three-four tiered approach by establishing differing distribution models
  • Posted by Peter (henna gaijin) on 6/15/2017 at 12:16 AM Accepted
    Adding your cost in, you have margins of 4 dollars and 12 dollars.

    If you price at $6 and sell to both the 800k low risk and 200k high risk, with $2 product cost, you will have margin of $4 million.

    If you price at $14 and just sell to the 200k high risk, with $2 product cost, you will have margin of $2.4 million.

    This is assuming you can't differentiate - Mgoodman's 2-tiered plan. Differentiating and tiering is actually pretty common, but challenging to do. For example, Lexus is the higher end version of Toyota. Many lexuses and Toyotas are built side by side on the same manufacturing line, but are priced differently.
  • Posted by Shelley Ryan on 7/5/2017 at 6:03 PM Moderator
    Hi Everyone,

    I am closing this question since there hasn't been much recent activity.

    Thanks for participating!

    Shelley
    MarketingProfs
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