When Is a Pricing Problem Not a Pricing Problem?

Posted by Reed Holden on Jul 26, 2017 6:42:10 PM
Reed Holden

This is a story of a highly specialized drug, Ilaris, which is sold by Novartis for $16,000 a dose or $64,000 a year. They sell to under 10,000 patients a year. Novartis discovered that the drug may also have a beneficial impact on heart attack survivors. There are 615,000 survivors a year, 246,000 of whom would benefit from the use of the drug.

Novartis now faces the question: If the drug is approved for broader use, should they drop the price for the broader market? The simple answer is, yes, of course, especially given the high contribution margin (to compensate for high development costs) of many drugs.

Rather than get into the nature of the drug industry where they also have to worry about other competitors in the bigger segment and the issue of insurer co-pay's and going off-patent, let's look at this from a very simple product strategy lens.

Vendors love high-value, high-priced segments. Their lust for the bucks often causes them to ignore lower-value/price segments. They do so at their peril (think Xerox and IBM), allowing the lower segment to get established, grow, and eventually go right after the higher-value segment.

Fortunately, for most, the decision is not whether or not to drop the price of the high-value product, it's whether it's worthwhile for them to introduce a new, lower-price, lower-value flanking product. Often that product is viewed on its own merit, but product analysis would be more productive if it is also recognized the extent of price protection it provides to the higher-value product.

As is more often the case, vendors don't develop the lower-value product, and when competition begins to erode the price of the high-value product, they drop its price to match the lower-value competitors. The net result is an unprofitable product.

My point is that a lower-value flanking product is almost always the better solution than lowering the price. It is not always necessarily a pricing problem…in this case, it is more a product strategy decision.

From: "A $16,000 Medicine Spurs Pricing Dilemma" by Denise Roland, in The Wall Street Journal, July 13, 2017




Topics: Newsletter, Pricing with Confidence