Pricing Lessons from the Pharmaceutical Industry | Strategic Pricing Solutions
Over the past several months, pricing strategies and practices of the pharmaceutical industry have been a subject of discussion, many times for the wrong reasons. In particular, Valeant has come under extreme criticism for raising the prices of its drugs. Another company, Turing Pharmaceuticals raised the price of Daraprim from $13.50 to $750.00, an increase of more than 5000%. Last year Gilead set the price of its Hepatitis C drug, Sovaldi, at $84,000 for a 12-week treatment. All of these cases resulted in politicians calling for more regulation of drug pricing. However when we look back at them, Gilead’s pricing of Sovaldi looks smart, whereas Valeant’s and Turing’s actions look regrettable. So let’s try to learn from their pricing successes and failures.
There are many things to be learned from studying the pricing actions of others, but there are three critical take-aways from these:
- Take the time to determine the real value of your product up front and get pricing right the first time
- Communicate your complete value proposition to your customers
- Make corrections in logical increments over time
Too often companies have a ready, fire, aim approach to pricing new products. They may take a cost-plus approach which has nothing to do with value, or perhaps shoot for quick market share with low prices, or respond to external pressures to provide more benefits for less. When one of these approaches is taken, the company invariably makes less money than expected or fails to sell as many units as their market research would have predicted; and they disappoint their shareholders. Worse yet, they have to try to adjust having set an inappropriate reference point.
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