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Pricing Pharmacist Services

Learning Objectives
Explain why pricing is an important part of marketing pharmacy products and services. Discuss how pricing relates to other elements of the marketing mix. List and discuss the effects of consumerrelated factors, competition, pharmacy objectives, and costs on pricing decisions. Calculate the cost of providing a pharmacist service.

Learning Objectives (continued)


Explain the relationships among price, cost, and demand for a pharmacist service. List and explain the steps involved in one strategy for pricing pharmacist services. List and explain methods of presenting service prices to consumers.

Components of price

PRICE = INGREDIENT COST + SERVICE COST + PROFIT DISPENSING FEE

Measures of Rx ingredient cost


AAC -- Actual acquisition cost AWP -- Average wholesale price (its really not) EAC -- Estimated acquisition cost MAC -- Maximum allowable cost -- multisource / generics AMP -- Average manufacturers price

Average per Rx profit


Based on required return on assets Ex: $100,000 in Rx-related assets 12% required ROA 60,000 Rxs per year ROA = Net income / Assets NI = 12% x $100,000 = $12,000 NI / Rx = $12,000/ 60,000 = $0.20

Pricing
Focus on value what is product or service worth to consumer Value depends on
Consumer perceptions How well service is provided How convenient service is How well benefits are explained

Value depends on all elements of marketing mix.

Pricing
Consider value to consumer Set price to provide value Cost affects pricing primarily as it affects value Noncost factors equally important

Demand
Quantity that consumers will buy at a given price Different from need
Can be affected by marketing mix Is a function of price

Demand Curves
200 180 160 140 120 Price 100 80 60 40 20 0 0 10 20 30 40 Quantity 50 60 70 80

inelastic

elastic

Price Elasticity of Demand


% by which quantity demanded changes when there is a 1% change in price Elastic greater than 1% change in quantity Inelastic less than 1% change in quantity Price elasticity of demand = consumer sensitivity to price

Consumers more sensitive to price when


Cost of product is large part of total cost Minimal differences among products - Consumer can judge quality - Comparisons are easy to make Switching costs are small

Competition

Prices must be in line


Distinct advantage

That consumer recognizes and values Reference prices

Pharmacy Image
Price consistent with image
Consumers choose based on perceptions

Price as a Signal of Quality


High price = high quality
When hard to judge quality When quality is variable and risk high

Pharmacy Goals
Maximize long-run profit Increase sales or market share penetration pricing Increase sales of other products loss leader pricing Attract only customers willing to pay for better service price skimming Maintain status quo match competitors prices

Nonmonetary Costs
Time costs Search costs Psychic costs

Demand Backward Pricing


3rd party payers cover 85+% of Rxs.
3rd party payers set prices. Pharmacys goal is to profitably provide services at given price.

Suggested Pricing Strategy


1. Estimate demand 2. Calculate full service cost (SC) 3. Determine avg. net income (NI) consider goals 4. Set price = SC + avg. NI + product cost 5. Compare demand and price re-evaluate if necessary 6. Consider competitors responses 7. Implement price 8. Monitor patient and competitor response 9. Re-evaluate price periodically

Estimated Demand for Diabetic Counseling


Price $20 $25 $35 $45 Quantity Demanded 1,000 750 500 250

Service Cost for Diabetic Counseling


Volume 1,000 750 500 250 Service Cost $25 $33 $49 $98

Estimate Net Income


$15,000 in assets for DCC Want a 12% ROA $15,000 x 0.12 = $1,800 Need $1,800 in annual profit to get 12% return At volume of 500 sessions, average profit = 1,800/500 = $3.60 Assumes goal of long-run profit

Set Price
Volume 1,000 750 500 250 SC $25 $33 $49 $98 Avg. NI 1.80 2.40 3.60 7.20 PC 0 0 0 0 Price $26.80 $35.40 $52.60 105.20

Compare
Volume Assumed 1,000 750 500 250 Price Demand at that price $26.80 < 750 $35.40 500 $52.60 < 250 105.20 << 250

Re-evaluate
Problem: prices will not generate enough demand Solutions Cut costs Increase demand Do not offer service

Pricing Strategy
1. Consider competitors responses reevaluate as needed 2. Implement price 3. Monitor patient and competitor response re-evaluate as needed 4. Re-evaluate price periodically

Pricing Strategy
Set profit margins based on product demand Focuses on consumer perceptions
1. Market priced charge low margin - 10-25 Rxs / 30% volume 2. Staple charge avg. margin - 75 Rx products / 25% volume 3. Premium charge high margin - the rest of products

Pricing Strategy
Consistent with focus on ROA
ROA = NI/Sales x Sales/Assets NI/Sales measures profit per unit Sales/assets measures turnover or speed of sales So, you increase return by ?