(Second of Two Parts)
If you want to be on the CUSP of success, your pricing activities must be driven by a marketing strategy shaped by clear product objectives.
Last month I wrote about strategy and integrity and how those concepts can best be defined to achieve marketing goals. Picking up on that theme, I want to now focus on tying the elements of marketing together, especially those that drive the bottom line. Although virtually every marketer can recite the “4 Ps” of marketing (product, price, place and promotion), and will almost automatically say that pricing is part of marketing, few pharma marketers pay much attention to pricing (except perhaps at launch), even fewer think about distribution, and almost none worry about the interaction of these elements. In many companies the areas of pricing and contracting are separate—run by different people reporting to different managers— and sometimes in different divisions of the company. This separation of pricing from both contracting (which is simply tactical pricing execution) and marketing (of which pricing is an important element) is endemic in the industry and counterproductive. As it stands right now, there is a better than even chance that your list price was set in a vacuum and the contracting activities around your product are interfering with your marketing strategy. Your marketing is, for all intent and purposes, disintegrated.
Consider a product that is the leader in a mature category where there are several competitors and where prescribers are fully aware of the products and the ways they are used (there can still be growth potential through new patients, but only limited growth from new prescribers). Because this product is the leader it has a high share (the highest) in most managed care plans and the firm wants to maintain that high level of share. There are several options for contracting, the two most obvious are:
Continue to offer the basic contract and hope a competitor doesn’t get too aggressive and convince some health plans to put you at a disadvantage.
Use your market power and establish “exclusive” contracts where you put you competitors at a disadvantage.
Option 1 is risky because a frustrated competitor is likely to offer a great deal to a payer. Whether the payer accepts the deal depends on the size of the category and their own comfort with trying to move physician and patients to a different product (which varies tremendously by payer and category, so this is NOT a slam dunk). If a big payer accepts the deal you could be hurt. Option 2 is also risky because it could result in losses or greatly reduced gains for competitors who would then feel compelled to offer better deals to payers, either to make up for the losses or to try to hurt you to get even.
Variations of these and other options will be discussed and considered and at some point somebody is bound to come up with a whole new “contracting strategy” (probably very aggressive) that will result in some early wins but force your competitor into a corner, and into some decisions that will hurt you. This situation, which is happening in several categories right now, would not have taken place if the product team had laid out a clear and specific objective for the product and then built an integrated strategy around it.
The specific measure or metric in your objective, as I wrote about last month, will help determine the types of resources and activities you put behind the strategy, and the timeframe helps to further align them. You can work to maximize market share, top line sales, profits, penetration into new prescribers, or any of a number of very specific metrics. But each of these measures requires a different mix of resources, even a different mindset. If your promotion (message, media and intensity), pricing (level or change in the list or catalog price) and contracting (the depth of discounts and specific terms of the contracts) don’t each change when you are seeking different results (objectives), then you are simply not doing it right and are missing out on opportunities.
These marketing elements are all tools you can use to achieve your objectives, but different objectives require different applications of the same tool. For instance, if you want to maximize top line sales over a one-year period, you can simply raise your list price very high while also choosing to either eliminate contracts altogether or become more aggressive and give discounts equal to your price increases so that payers don’t feel the increase. Both will make top-line sales increase (through the list price change), while the contracting choice has a different effect on profit and long-term relations in the market. Note that I didn’t mention promotional tools because in a single year it is difficult for a new promotional plan to have much of an effect unless you really have something great to say—in which case you should not be implementing only a 12-month strategy. If, however, you want to maximize top-line sales over a five-year time frame, you would be less aggressive with list price increases (so as not to draw too much attention) and probably be more aggressive with promotion, to try to drive use, and use contracts to secure and leverage your market position. You can use promotion to make customers more price sensitive or to make them less sensitive to economics and more responsive to other elements. Quite simply, the metrics of success determine which levers to pull in the marketplace and how to pull them.
Companies that use their marketing tools the same way in every case—such as only raising their prices without considering the effect on other aspects of marketing, taking the same promotional message to the market over and over or, worse yet, signing every MCO contract that comes along because of blind faith that it should be done—are making huge mistakes. Sensible companies should move away from the use of their tools as separate entities that don’t have an effect on each other and transition into organizations that use these tools in a purposeful and integrated way. The critical union of that strategy and the application of sensible pricing activities is the key to that success. By the way, please note the intentional acronym that is created by the headline “Critical Union of Strategy and Price”: a CUSP is a transitional point, and you can be at such a point if you chose to take advantage of it.