Price targeting strategies and degrees in modern industries

Price Targeting Industry

Customers usually complain that they purchased the same product or service at higher price than their friends did. This is actually the price targeting technique that sellers use in order to receive maximum profits or revenue. However, if the customers are aware of the actual price and sellers' technique then they can make a better deal.

Price Targeting

Price targeting is one of favourite techniques of vendors to earn more profits since they can sell the same product or service at different prices to different customers. By this method, vendors identify point of transaction where consumer decides to purchase the product or service and is ready to pay amount close to the maximum price. Thus, the vendors may capture the consumer surplus.

Retailers make discrimination in prices because consumers also hide the maximum price that they are willing to pay off for the particular product or service. Therefore, retailers also do their best to bring customers at the level of maximum price they are willing to pay.

(Martinez, 2010)

Price Targeting Conditions

Before the retailers or companies set different prices for the customers, they first divide customers into groups based on the difference in price elasticity of demand. The company charges more to the group that has low price elasticity of demand and less to the group that has higher price elasticity. By this strategy, the company can boost its profits or revenue.

However, the group with high price elasticity of demand may resell the product to the group who has low price elasticity of demand. Therefore, the companies must consider the suitable pricing strategy that prevent consumers switching or market seepage.

Pharmaceutical Companies Price Targeting

Pharmaceutical companies, stakeholders and other global health donors have already recognized need for the careful consideration of factors that restrain the usage of price targeting or discrimination as a mechanism to increase access to drugs in poor and developing countries without affecting their profits. Since, price targeting in the market of drugs can help people living in low and middle income countries. Setting the price of drugs as according to purchasing power of consumers can effectively improve the health conditions all over the world. Pharmaceutical companies were reluctant of changing their pricing models because of the fear of losing their profits in middle and high income markets. However, the emerging markets and the growing competition among the pharmaceutical companies has changed thoughts on pricing strategies and majority now follows the price discrimination mechanisms.

In case of Pharmaceutical companies, usually the third degree of price targeting is applied. Consumers are segmented as according to geography and socio-economic conditions. In western countries, the insurance companies pay for the patient to the pharmaceutical companies or the western citizens have low price elasticity of demand. They can pay the maximum price for the drugs. Therefore, the pharmaceutical companies also set the higher prices whereas in case of Asian countries like India, Pakistan and other underdeveloped countries, there are poor conditions of health. People cannot afford high prices of drugs. So, the lower prices in poor countries may increase the company profits as well as increase access of drugs for the citizens. However, there are many other factors that companies have to consider like competition, purchasing power of buyer, distribution channels and price controls.

Pharmaceutical companies need to look upon different aspects along with profit maximization so as to maintain their positioning in the market. The pharmaceutical company has to prove itself as socially responsible organization that not aims to make profits but also cares about the societal obligations and responsibilities. Price targeting or discrimination provides an opportunity to pharmaceutical companies to prove itself as socially responsible and consistent. Low prices in developing countries and setting prices as according to the income level increase the access to medicines. Pharmaceutical companies are implementing the same pricing strategy for the welfare of society. (Avert)

If pharmaceutical companies apply suitable pricing strategies then it can lead to increased sales, profits and society welfare. Much research has already been done on the positive impact of pharmaceutical companies' price targeting on societal welfare.

It is a better strategy for the pharmaceutical companies to increase their profits, if they open markets in countries where there is low affordability than the prevailing price in present markets. In this way the price targeting will increase consumer as well as producer surplus.

In addition to the consideration of low and high income countries, it is also important for the company to consider the economic, social and political conditions in the country. For example, some low and middle income countries use price ceilings on drugs like South Africa. Moreover, the intellectual property regulations are also different in counties; therefore company has to plan accordingly. Pharmaceutical companies also offer donation programs in low and middle income countries so as to receive tax benefits.

The generic producers in Asian countries have already captured high shares in the market so it has become difficult for patented pharmaceutical companies to position themselves in the market. Since, these generic drugs are supplied at lower prices so the pharmaceutical companies needs to lower the prices as well to compete with generic producers. Price targeting strategies can help pharmaceutical companies to maintain their competitiveness in distribution and production costs and compete with the generic manufacturers. Patients will definitely prefer to purchase patented drugs instead of generic medicines if retailed at the same price. GSK, the patented drug company has recently reduced the prices of its medicines low developing countries for the purpose of public health advantage. The prices are set as according the income level, market share of health system and structure of health system.

Pharmaceutical companies for HIV and autoimmune medication have high opportunities in Asian countries as the new and effective HIV medicines are only available in western countries. Moreover, Asian market was not served earlier because of low level of affordability and demand for HIV drugs. But price targeting strategy has open doors of opportunities and economic scope for the pharmaceutical companies. Now these companies can tap more customers and also build relationships with them that would provide benefit in the long run.

Moreover, the price targeting strategy also helps the pharmaceutical companies to deal with generic variant of drugs. Since, as according to the agreement, in case of national emergencies or public health crisis like tuberculosis, HIV / AIDS or malaria, it is not obligatory to make prior negotiations with patent holder for receiving voluntary licensing. World Trade Organization (WTO) meeting also decided in 2003 that developing countries will be allowed to import generic drugs under patent for the treatment of AIDS, malaria and TB. Therefore, differential pricing with low prices can deal with the risks and threats.

Pharmaceutical Companies' Price Targeting HIV and Autoimmune Medication

In developing countries, the HIV is increasing among the citizens. The sad side is that people are not even able to afford the basic medication for the disease and therefore the death rate due to HIV is increasing. During the last decade the activist groups and organizations teamed up to raise voice for the welfare of poor and developing countries. Moreover, the emergence of competition and profit opportunities has convinced the pharmaceutical companies to drop the HIV and AIDS drugs prices. It is because of this act that people in poor countries are able to access HIV and AIDS drugs at low prices. Nearly 6.64 million people in developing countries are getting the HIV / AIDS treatment at much lower rate. Though major problems regarding the HIV / AIDS treatment have been resolved but still some problems are there. Like not all HIV / AIDS drugs are available in poor countries but only the cheap medicines. The latest effective medicines are only available in rich western countries. It is because the pharmaceutical companies dealing in HIV and autoimmune medication do not receive enough profits on reducing prices of new medicines in poor countries. (dnanews, 2012)

However, the suitable price targeting can help in achieving a win-win situation. For example the pharmaceutical companies may negotiate with government on discounted prices, price ceilings and reducing the tax rates for the welfare of citizens as well as for the company's profit. This may also increase the access of new and effective HIV medicines in Asian and other developing countries. (Yadav, 2010)

Since, large pharmaceutical companies deals and supply their HIV and autoimmune medication all over the world. Therefore, it is difficult to set best prices as according to the willingness and ability of the patients to pay for the HIV medication in different countries. For this case, it is a good technique to estimate incremental cost per life year based on per capita GDP for each country. World Bank suggested that health care interventions can be considered profitable if healthy life can be achieved in a year for less than the national average per capita GNI. Thus, pricing strategy can be developed as according to the Gross National Income (GNI) and efficacy measure of each country.

There are other price targeting options that the companies and government can apply so as to increase the access of medication for patients. The three price differential mechanisms are internal company policy-based differential pricing, wider distribution of price information to different actors and international agency facilitated differential pricing. (Reich & Bery, 2005)

There are number of benefits for using price targeting strategies by pharmaceutical companies in Western and Asian countries. Since, most of the Asian countries are still in developing phase and citizens have low income level so they cannot afford the high prices of HIV medicines. Therefore, pharmaceutical companies help such countries by reducing drugs prices and at the same time patients can easily access the medicines. This increases company sales and thus provides profit and higher revenue. However, low pricing does not affect the prices in Western countries. They are offered the prices as according to the income level but there are some issues that pharmaceutical companies needs to consider. When the drug manufactures sell their medicines at lower prices in poor countries, these drugs are resold or smuggled in the countries where people are willing to pay higher prices for the medicines. It also happens that the manufacturers selling drugs to downstream buyers at wholesale prices supply medicines at much higher price to the final consumers. Thus, it not only triggers loss for the company but also affect the welfare of society. Therefore, pharmaceutical companies need to consider on reliable distribution channels and consumer switching. (Hornbeck, 2005)