The Magilla Gorilla Show’s theme song chanted that “at any price, a gorilla like Magilla is mighty nice.” And MasterCard’s “Priceless” campaign reminded us that “there are some things money can’t buy.” But beyond one-of-a-kind primates and very special moments, most products have a cost, and their cost impacts payers’ market-access decisions. For manufacturers, pricing strategy is critically important: charge too much and face additional restrictions; charge too little and leave money on the table.
Predicting payers’ reactions to different cost scenarios is a critical marketing endeavor. But there’s a lot of bad pricing research out there and, as a result, suboptimal pricing and contracting decisions. Let’s look at three common pricing research mistakes.
1. Incomplete profile
If payers’ cost sensitivity is a concern, then the product must be described in exhaustive detail. Too often, payers complain that health technology profiles used in pricing research are incomplete and lack important details. For example, overly simplistic safety statements without serious and non-serious adverse event rates and associated discontinuation rates are less than satisfying to payers. Missing information typically prompts payers to question what the manufacturer may be glossing over. Why suppress information that will, in part, inform payers’ future decisions? When in doubt, provide specific, plausible numbers based on the best data available.
2. Fuzzy context
Payers don’t make decisions in a vacuum. Market-access decisions are made in the context of the market. Manufacturer’s assumptions about the future availability, performance, cost and market share of products, market events, and other market forces like guidelines and regulations are often sketchy at best. Sometimes manufacturers are reluctant to provide details of potential market scenarios, fearing that they may inadvertently promote competing products. But how can a payer possibly imagine a future in which the market is not described in detail? This is precisely the information payers consider when making market-access decisions. Absent this market context, the correct payer response to most questions about how they would act in the future would be “it depends” — not what manufacturers want to hear. Worse yet, the frustrated payer may cope by offering an easy answer — any answer — simply to satisfy the researcher’s need for an answer.
3. Mystery cost
An all-too-common mistake researchers make is to latch on to some worn variation of questions first proposed by Dutch economist Peter van Westendrop more than 40 years ago. These questions search for price tipping points that change the perceived value of the product (e.g., good value, expensive, too expensive, too cheap), a well-meaning exploration. Yet this particular course is a total distortion of the real-world interaction between manufacturers and payers. In the real world, manufacturers set prices, and, in response, payers make market-access decisions. Asking payers to pick price points is a nonsensical, topsy-turvy approach. Why some pricing “experts” cling to this approach is an enigma — an approach that should disqualify them from manufacturers’ consideration. Not surprisingly, payers are often frustrated when asked, in essence, to set a price they think is reasonable. News flash! Payers think many prices are unreasonable.
Check, please
Good pricing research is not easy, but it is easy to do bad pricing research. The basic smell test for any proposed approach is pretty straightforward and consists of three core questions: Is the profile complete? Is the market context described in full? Are specific costs tested? If the answer to any of these questions is “no,” then the research is flawed and the insights are suspect. Fortunately, manufacturers often have opportunities to correct initial pricing mistakes. Price increases can decrease the amount of money left on the table, and rebates can bring the cost down in an attempt to loosen restrictions. Ideally, manufacturers would commission a good study and set the right price right out of the gates. And like a generous tip for good service, leaving some money on the table is a good pricing strategy.
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