Pricing Strategies For Pharmaceuticals
PRICING STRATEGIES
FOR
PHARMACEUTICALS
9 Pricing Strategies for Pharmaceuticals One of the essential sectors of every world economy is the health care sector that is mandated with the duty of taking care of the health care needs of people. People need a good health care system that can cater for all their medical needs efficiently. In the health care sector, drugs are important such that they form the framework for the existence of medical facilities. Patients need medical drugs that have been professional prescribed by their medical professionals. The pharmaceuticals can be found in health care facilities and in most cases apart from health care facilities.
Pharmaceutical goods are necessary to enable the health care process to be a success. Notably, it is a product that is always in high demand and one that cannot be thrown out of the market due to changing preferences of consumers. For this reason, there has been the emergence of many pharmaceutical shops located in different parts of society. Even though the goods offered is similar in all pharmaceuticals, one can note that the pricing methods differ. Markedly, it is impossible for the quality of the pharmaceutical drugs to tamper with such as raising the quality to gain more customers.
In fact, pharmaceuticals is a sensitive product that requires uniformity among all its producers. However, different pricing methods can be employed to be able to procure a large number of customers in the market. Market Structure of the Industry It is noteworthy that the pharmaceutical industry has an oligopoly market structure. Bloch, Eaton& Rothschild (2013), posits that an oligopoly market structure involves a market that is characterized by a small number of firms that hold the majority of the market share. An oligopoly market structure involves one that has price stability on the market, restricted information about the production of a particular good or service, high barriers that aim in the restriction of new entrants, and a small number of firms that dominate the whole industry.
Further, there is a high degree of interdependence and the existence of price stability within the market. There is interactivity in oligopoly markets whereby the actions of one firm are influenced by other firms. In this regard, oligopoly market structure gives the few firms that exist in the market the power to set prices for their products as the competition levels are low. However, for the case of the pharmaceutical industry, most countries set premium prices for pharmaceutical drugs. Such a strategy aims at preventing oligopoly companies from taking advantage of their market power in the manipulation of prices.
Elasticity Demand It is apparent that in every market the interaction of producers and consumers forms the
framework for the pricing of goods and services. Identically, the theory of supply and demand is crucial in determining the pricing of goods as well as its elasticity demand. For this reason, there are two types of drugs; prescription drugs that are essential for pharmaceutical retailers to have and over the counter drugs that are not that essential. Medicines that are not essential are observed to have and which a buyer could refuse to have more elastic prices. On the other hand, pharmaceuticals that are essential are observed to be less elastic whereby buyers will be less sensitive to high prices (DeCicca & Kenkel, 2015).
Another element to note is that medical professionals do not consider the pricing of pharmaceuticals when giving out a prescription. However, a patient can be provided with a certain prescription for a drug that can be purchased from a pharmaceutical shop. At the pharmaceutical shop, a patient can encounter different forms of the same drug. The different forms of a drug perform a similar function but only differ regarding the quality. Subsequently, the unique quality of each brand would have unique pricing tags.
How Pricing Relates to Elasticity of Demand for Competing Models Price elasticity refers to the measurement of how the quantity of the demand of a good or service would affect if there are some alterations in the pricing. It is noteworthy to mention that product pricing in a competitive model is a sensitive matter that needs to put into consideration both the endogenous and exogenous factors. Therefore, a firm needs to consider the financial goals of a company as well as the market conditions and strategy. For this reason, the life cycles of a product need to be considered for both the short term and long term goals of a company. Moreover, the products margin, production cost and experience, demand, consumer utility, and quality of a product need to be considered before embarking on the decision to set prices (Danzon, Mulcahy & Towse, 2015).
There are various things that need to be considered before altering with the price of a good or service. In the first place, there is the question as to whether a good or service provided is a necessity or a luxury good. Markedly, luxury goods tend to be elastic because those are things that are not necessary for one’s survival. On the other hand, necessity goods are inelastic because of how essential they are for normal living conditions. Another element that needs to be considered when determining the elasticity of a good or service is the presence of substitutes in the market.
Apparently, the presence of many substitutes can make a product elastic. For this reason, an increase in the price of a product can lead to consumers running to other substitutes for the same product. Pricing can also relate to the actual value of a product or service such that high-quality goods cannot be given the same
pricing as goods that are of low quality. When it comes to the pharmaceutical sector, it is observed that the products offered are a necessity such that an alteration of the pricing would not affect the demand of customers for the same good. Furthermore, pharmaceutical products have low substitutes due to the patenting of products and the oligopoly market structure.
The marker structure does not give room for substitutes or competitors to existing in the market. However, it is worthy to posit that the quality of a product is a factor that determines the elasticity of pharmaceutical products. Comparatively, because it is a necessity, consumers tend to go for the best quality to maintain quick health recovery (Foxall, Yan, Oliveira-Castro & Wells, 2013). How Changes in Quantity Supplied
Might Affect a Company Changes in the quantity supplied can have significant effects on a company as a whole. In the first place, when the production volume rises, the marginal costs will similarly rise in response to the rise in the production levels.
Secondly, there will be an increase in the marginal revenue because of the increase in production levels and a consequent increase in the sales. Thirdly the market share would increase because of the volume rises and the increase in the sales of a product. For this reason, when a company implements a good pricing strategy, positive results can be realized in the profit margins of an organization. When one producer changes the pricing strategy, other producers perceive it regarding how their businesses would be affected. A decrease in the pricing by one producer can lead to the loss of customers by the other producers.
In this manner, a change in the pricing strategy by one producer leads to other producers making adjustments and changes in the pricing strategy on their part so that they can stay on top of the competition (Mankiw, 2014).
Product Differentiation and Market Segmentation According to Baker, K., Bull & LeMay (2014), product differentiation can be achieved through various ways such as changing the pricing of a product, creating a unique brand or image in the minds of the consumers. Furthermore, a company can use the strategy of advertisement to identify with the customers and to publicize on the product offered. Alternatively, a company can change the physical location of a product to differentiate it from its competitors.
On the other hand, when it comes to product segmentation, a company can do marketing to gain knowledge on the tastes and preferences of the different market segments. Afterward, a company can improvise on its product to be able to meet the preferences of each market segment. Altering the Mix of
Fixed and Variable Costs to Support Pricing Strategy When it comes to altering the mix of fixed costs to support pricing strategy. A company should calculate the fixed cost of a company and set a price that would cover the fixed cost incurred. On the other hand, in regards to variable costs, a company should select a price that is higher than the variable cost of producing a product. In this manner, every sale made will cover the fixed costs incurred (Varian, 2014).
References
Baker, K., Bull, G. Q., & LeMay, V. M. (2014). The use of fuelwood market segmentation and product differentiation to assess opportunities and value: A Nicaraguan case study. Energy for Sustainable Development , 18 , 58-66.
Bloch, H., Eaton, B. C., & Rothschild, R. (2013). Does market size matter? A dynamic model of oligopolistic market structure, featuring costs of creating and maintaining a market position. A Dynamic Model of Oligopolistic Market Structure, Featuring Costs of Creating and Maintaining a Market Position (June 12, 2013). CRAE Research Paper , ().
Danzon, P. M., Mulcahy, A. W., & Towse, A. (2015). Pharmaceutical pricing in emerging markets: effects of income, competition, and procurement. Health economics , 24 (2), .
DeCicca, P., & Kenkel, D. (2015). Synthesizing Econometric Evidence: The Case of Demand Elasticity Estimates. Risk Analysis , 35 (6), .
Foxall, G. R., Yan, J., Oliveira-Castro, J. M., & Wells, V. K. (2013). Brand-related and situational influences on demand elasticity. Journal of Business Research , 66 (1), 73-81.
Mankiw, N. G. R. E. G. O. R. Y. (2014). Principles of macroeconomics . Cengage Learning.
Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.