Essentials of Health Care Marketing 2nd Ed.

Eric Berkowitz

Chapter 9

Price

Chapter 9 Learning Objectives

1. Appreciate the many factors that affect pricing decisions

2. Recognize the array of alternative pricing strategies available to health care marketers

3. Calculate break-even pricing

4. Learn the positioning value of price

Introduction

Price – The level of monetary reimbursement a firm

demands for its goods or services– Represents the economic value that the buyer

provides to the producer in exchange for a product or service

– Price should be established that corresponds to the level of value that the consumer perceives in the service being offered

– Can affect consumer demand & competition response

Introduction

• Price in healthcare– Previously was based on predetermined

reimbursement formulas– Competition or consumer perception of value

were not considered– Managed care has changed all this

(capitation)– Pricing information now on the Web, and is

scrutinized

Learning Objective 1

• Establishing the price– Multistep process

1. Identify the constraints to the pricing policy

2. Determine objectives

3. Estimate demand and revenue

4. Determine the cost, volume, and profit relationships

5. Select a pricing strategy

6. Consider the positioning element

Learning Objective 1

• Identifying constraints– Demand – basic economics– Newness in life cycle

• Volume objectives or profit objectives

– Single vs. Multiple-Product pricing• How many products in line? Complementary?

Learning Objective 1

• Identifying constraints continued– Production Cost– Channel Length (distribution determines

price)– Market Structure

• Monopoly, oligopoly, monopolistic competition, pure competition

Learning Objective 1

• Pricing objectives– Profit– Sales– Market share– Image– Stabilization

Learning Objective 1

• Estimating demand and revenue– Prepare a demand schedule summary of

amounts of a product that are desired at each price level

– Helps understand consumers’ price sensitivity at various levels

– Price elasticity – change in demand relative to price changes

Learning Objective 1

• Cost and volume relationships– Fixed costs – do not change based on

volume – Variable costs – vary with amount of service

delivered– Total cost – total expense firm bears in

delivering and marketing its service• Combination of fixed and variable costs

Learning Objective 1

• Cost and volume relationships continued– Cost-plus pricing

• Selling price represents total cost of service plus some additional amount for profit

• Does not consider the differences between fixed and variable costs

Learning Objective 1

• Cost and volume relationships continued– Marginal Cost Pricing

• Price per additional procedure must equal or exceed the cost of an additional procedure

• Useful in attracting large-volume purchasers

– Markup pricing• P=BR; Price = Service Cost

(100-Markup %)/100

Learning Objective 1

• Cost and volume relationships continued– Target Pricing

• Sets price to provide a targeted rate of ROI for a standard level of service delivery

• Common in capital-intensive firms• Limitation – price is set w/no consideration of market

demand.

– Demand-Minus pricing• What the market is willing to pay, and mark backwards• Very marketing-based vs. CFO-based

Learning Objective 3

• Break-even analysis– Company determines break-even point

needed to cover total costs.– Break even point = total fixed cost

price - variable cost

– Point of volume where total revenue equals total cost.

Learning Objective 2

• Pricing strategies– Price lining – product lines

• Gives impression of quality differences between price lines

– Odd pricing – just below whole $ amounts• Item budget theory

– One-price vs. flexible pricing• One-price policy, same price to all customers

under same conditions• Flexible pricing policy – negotiation, consumer

buying power

Learning Objective 2

• Pricing strategies– Prestige pricing– Leader Pricing– Bundled Pricing– Going rate pricing– Discounts

• Volume• Functional• Seasonal• allowances

Learning Objective 4

• Positioning value of price– Consider competitive environment & where

product/service is priced (high/low)– Consider how much focus will be placed on

price in promotion (active/passive)

Summary

• The price an organization establishes has an economic, perceptual, and positioning value to the firm.

• Multiple factors affect the pricing decision, such as demand, life cycle, product line, and channel structure.

• Organizations can pursue several different pricing objectives – profit, sales, market share, image, and stabilization.

Summary continued

• An important consideration in pricing is determining the amount of sales needed in order to break even. This figure is based on the total fixed cost, variable cost, and price charged.

• In addition to break-even pricing, firms can follow a cost-plus pricing, marginal cost pricing, markup pricing, target pricing, or demand-minus price-setting policy.

• In establishing price lines, it is essential to have noticeable differences in perceived quality for the distinct lines.

Summary continued

• Odd pricing is based on item budget theory, which assumes a consumer predetermines the amount to be spent on an item.

• Prestige pricing is counter-intuitive to the economic logic of a rational buyer. Too high a price, however, will lead to a decline in demand.

• Bundling, or selling several medical services together at one set price, is becoming a common strategy in health care.

Summary continued

• There are several ways an organization can reduce the price for a product. Discounts can be based on volume, function, seasonality, or an allowance.

• Price has an important positioning value depending on how active or passive a role it plays in the promotional strategy, and on the level of the price relative to the competition.