Chapter 12
Pricing Pharmacist Services
Norman V. Carroll, PhD
Professor of Pharmacy Administration
Virginia Commonwealth University School of Pharmacy
Chapter 12 slides for
Marketing for Pharmacists, 2nd edition
Based on Carroll, N.V., “Pricing Pharmaceutical Products and Services,”
in Financial Management for Pharmacists: A Decision-Making Approach,
Third Edition,” Baltimore: Lippincott Williams and Wilkins; 2007.
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
(it’s really not)
EAC -- Estimated acquisition cost
MAC -- Maximum allowable cost
-- multisource / generics
AMP -- Average manufacturer’s 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
inelastic
160
140
120
Price 100
80
elastic
60
40
20
0
0
10
20
30
40
Quantity
50
60
70
80
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.
Pharmacy’s 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 ?