The problem stems down to 2 decisions:
- The first problem is deciding on a pricing model for each package so that the company could generate the highest profits.
- The second one is how to package the treatment plan – should it be sold as one package or as several packages?
In the following sections we will show possible pricing model alternatives and a suggested packaging decision.
In the end, we will formulate a recommended marketing plan for the new product.
Pricing Alternatives
As seen from FDA trials, Metabical was most effective as a 12-week treatment plan drug. Since an incomplete treatment will be ineffective, the pricing and packaging model is intended to maximize the amount of individuals that complete the entire treatment plan while maximizing CSP's profit.
Market Size
US Adult Overweight population estimations:
First of all, we will address the question of the quantity of relevant costumers, and in order to do that we fist look at the data regarding the overweight population in the US:
-
From the fist bibliography report and Exhibit 1 we get the data regarding the US adult population from the late 70's until the year 2008, which can be seen in Table 1. Using linear regression (only on the data from 1992 and later), we extrapolate the expected amount of adults in the US for the 5 following years (the time period, after which we assume the drug will cease to be marketed), as can be seen in Figure 1.
Figure 1 – US adult population linear extrapolation
- In order to calculate the amount of potential customers for the drug, we need to find the overweight percentage of the population in the relevant years. In Exhibit 1 we see an increase in the overweight population percentage from 1976 to the year 2000, but from the second bibliography report we find that the percentage stabilizes around 34% between the year 2000 until the year 2008. For that reason we extrapolate that this percentage will stay relevant for the following 5 years, as can be seen in Table 1.
Figure 2 – US trends in overweight, obesity and extreme obesity among adults aged over 20 years
- The following table summarizes the data regarding US adult overweight population from the late 70's until the year 2013, when Metabical's marketing is expected to end.
Table 1 – US overweight population forecast
US Demand Forecasts
After calculating the potential market for the drug, we analyze three different possible demand forecast models, based on a CSP survey:
- Target market of 15% of the overweight individuals, who are actively trying to lose weight and are comfortable using prescription drugs in order to achieve said goal.
- 10% will be captured in the first year
-
Every subsequent year an additional 5% will be captured, up to 30% by the 5th year of marketing.
- Target market of 12% of the overweight individuals, who are ready to immediately go to their health care provider to request a prescription.
- 10% will be captured in the first year
-
Every subsequent year an additional 5% will be captured, up to 30% by the 5th year of marketing.
- Target market of 4.3 million educated females, aged between 35 and 65 with BMIs between 25 and 30, which represent a 5.46% of the 78.54 million (34% of 228 million) overweight US adults.
- 30% will be captured in the first year
-
Every subsequent year an additional 5% will be captured, up to 50% by the 5th year of marketing.
Table 2 summarizes the demand forecasts for the following 5 years, according to the three different demand models described above and taking into consideration the US overweight population expected in given years from Table 1.
Table 2 – Quantity of relevant customers (Q rc) according to three demand forecasts
Given the high price of the drug, selling the entire 12-week plan all at once might seem expensive to customers. In order to alleviate the perceived cost of the drug, the three month plan will be sold one month-long supply at a time (initial purchase and two one month-long refills repurchase). All three demand forecasts assume a repurchase model of 60%/20% meaning that 60% of the first time buyers will purchase the first refill and 20% will buy the second refill as well, meaning that ONLY 20% of the original buyers will complete the entire treatment.
Table 3 shows the calculation of the total amount of one month-long supply sold over a 5 year period, according to the three different demand forecast models.
Table 3 – One month-long supply sold over 5 years
Costs
From Exhibit 3, we see that the variable cost of producing a 4-week (one month) supply of the drug is $25.2 ().
Next we analyze the fixed costs of production, summarized in Table 4.
Table 4 – Fixed Costs summary
Furthermore, we take into account the fact that a retailer will normally receive a 33% gross margin of the retail price (RC – retailer's cut).
Interest will be ignored in profitability calculations (assumed to be 0%), the interest rate in the American market has been extremely low (practically 0%) since the beginning of the sub-prime crisis.
After having addressed all the relevant variables that affect Metabical's marketing, we move on to analyze the drug's profitability according to four different pricing models. In the following pages we will supply four different pricing options with their expected profits under each of the three demand forecasts:
1. Benchmarking
Using Alli (a non-prescription, FDA-approved weight loss drug for overweight individuals retailing at $190 for a three-month supply) as a benchmark, we decide to set the Metabical's retail price at $75 () for a one month-long supply, leaving a 50% gross margin. The price is determined according to Alli's price with a premium, since Metabical has less harmful side effects and needs to be taken only once a day.
The profitability calculations for each one of the demand forecasts can be seen in Table 5.
Table 5 – Benchmarking profitability by three demand forecasts
2. Cost +
This pricing option is based on Metabical's cost structure. The average CSP gross margin for a new prescription drug is approximately 70%. Based on this information, we can reach a pricing of $125 () for a one month-long supply.
The profitability calculations for each one of the demand forecasts can be seen in Table 6.
Table 6 – Cost + profitability by three demand forecasts
3. Value to costumer
From a cost-savings perspective, CSPs Outcomes Research Group established that overweight individuals spend roughly $450 out-of-pocket more each year on health care versus a person that did not carry excess weight.
Given that in just a year, an individual will (in average) save $450, it is fair to assume that sum will be the value to costumer, without even taking into consideration the many other positive effects (social, psychological) of a slimmer figure.
A quick calculation shows that if $450 is the value to costumer for a three month-long treatment, each one month-long refill should be priced at $150, since
The profitability calculations for each one of the demand forecasts can be seen in Table 7.
Table 7 – Value to customer profitability by three demand forecasts
It should be emphasized that according to a pricing study conducted with respondents from the ideal target market (i.e. educated females, aged between 35 and 65 with BMIs between 25 and 30) found this retail price acceptable. However, when tested with the general overweight market, the price was above what consumers indicated they would be willing to pay.
4. ROI
In this chapter, we have reversed the process and tried to find the required price for each demand in order to achieve ROI of 5%.
In order to do so, we used the “goal seek” method in order to achieve NPV=0 with yearly interest rate of the required ROI (5%), when taking all the sunk costs as they occurred in year 0 (2008).
In order to meet the return requirements, a different effective price was required by each of the different demand forecasts (see highlighted in Table 8).
Table 8 – 5% ROI profitability by three demand forecasts
The Effective price was found using the “goal seek”, and the price to customer is the effective price + 50%.
The conclusion from this analysis is that the price to customer required in order to achieve a 5% ROI is higher than the willingness to pay for Demand 1 (according to a study by CSP), and higher than 200$ for the ideal target market. Therefore, these prices are considered to be too high in order to reach the desired market share.
This calculation might change in case we take a much longer term evaluation than the 5 years analysis. As it seems from our calculations, the $400M investment wouldn’t be recouped in 5 years when addressing only one segment.
Pricing Summary
Profit forecasting for all proposed solutions:
Table 9 – Profit forecasting summary for all pricing options and all demand forecasts
Figure 3 – Profit forecasting summary for all pricing options and all demand forecasts
Table 9 and Figure 3 clearly show that the best pricing model for all demand forecasts is the ROI 5% model since it generates the highest profits for all demand forecasts. However, this model sets high prices (between $144 and $210) that are expected to be beyond the customers' willingness to pay.
Furthermore, according to CPS's survey, in the general overweight market (demand forecasts #1 and #2) a price of $150 (value to customer pricing) was not acceptable, though in the target market (demand forecast #3), it was.
In this section we conclude that addressing only one segment – either the general overweight population, or the target market – the profitability goals of CSP can't be reached.
Proposed Solution
In order to maximize profit, we propose to address these two segments at the same time while maintaining price discrimination. The segments are:
- Target market (demand forecast #3) – college-educated women in the ages of 35-65 with BMIs between 25 and 30. According to a market research study performed by CSP, $150 for a one-month supply is an acceptable price.
-
General overweight segment (demand forecast #2) – overweight people who are actively trying to reduce weight, willing to use drugs to do it and will actively acquire a prescription for a weight loss drug.
A significantly lower price than $150 will be set for this segment (we propose to start with $85 – still close to its main competitor price of $63).
Table 10 – Price differentiation (market segmentation) profitability calculations
According to this pricing structure, the achieved ROI meets the required 5%.
While maintaining a conservative demand forecast and reasonable prices a profit of over $27M is achieved.
In order to correctly segment the market, we need to subtract the target market population (5.46% of the US overweight population) from the general overweight population. Therefore, we should take into account only 94.54% of the general market:
Table 11 – Price differentiation profitability calculations – corrected segment size
In Table 11 we see that the ROI dropped bellow the required return. In order to achieve the desired return, a slight adjustment can be made to the price for the general overweight market, and brought from $85 to $86.
This new price differentiation is enough to reach the required 5% ROI, as seen in Table 12.
Table 12 – Price differentiation profitability calculations – 5% ROI
Implementation Plan
Following is the 4P's breakdown of our marketing implementation plan:
Product
As we already proposed, the product will be marketed as two different products:
1. "Easy Metabical" – An easy to use product, targeted to the first segment (the ideal target). This product will be the high-end product that will have 2 types of packages:
-
An introductory package – the product's larger package will be include
- A "blister-style" (day of week) pill package for the first 4 weeks of the treatment
- A short brochure of the drug's promotion
- A personal access code to the product's website
-
A refill package – A smaller package that includes a "blister-style" (day of week) pill package for another 4 weeks of the treatment.
2. "Metabical" – A regular product, targeted to the second segment (general overweight). This product will be the low-end product that will have 2 types of packages:
-
An introductory package – the product's smaller package will be include:
- A regular (not blister) one-month pills bottle, to be taken three times a day. Each pill will contain a third of the required daily dosage.
To avoid the customers taking three pills at a time in order to emulate "Easy Metabical", the drug should be mixed with another drug, harmless in a single pill dosage, but that causes discomfort in higher dosages.
- A short brochure of the drug's promotion
- A personal access code to the product's website
-
A refill package – A smaller package that includes an additional 3 pills a day, one-month supply.
Differentiation:
We propose using different color sets and brand logos for both brands.
We propose using the same color set and brand logos for both packages of the same product, while clearly stating on the refill package that it needs to be purchased after the introductory package and making it smaller.
All products' packages should be designed so that the FDA approval logo is big and clear, since it differentiates the product from many other non-approved products.
Both products' packages should reflect that this drug is much safer than its main competitor – the OTC drug "Alli". It could be done by using a green color set with the logo: The safest FDA-approved weight-loss solution.
Additional Features:
The company's website will feature an on-line weight-loss tracking system. Each introductory package will contain a personal access code to the website.
Customers will be able to surf the website with the access code and:
- Track weekly weight changes, with common statistics explaining expected progress.
- Setup daily e-mail or SMS reminder to take the drug.
Promotion
The promotion will be done according to the two market segments we identified in the proposed solution:
Promoting to the ideal target consumer (college-educated females aged 35-65):
-
Promotion using fitness centers – since most of this segment probably has more money than the average population – many of them probably try to lose weight by exercising in fitness centers. We suggest promoting the product as a supplement to their regular fitness training by using the fitness centers. The promotion can be done in one of two ways:
-
Collaboration with the large fitness training centers chains. CSP's Metabical promotion stands, which will include information and/or promotional salesperson, will be placed in various fitness centers in return for a fixed payment. The salesperson will try to make fitness centers' customers aware of the new drug and its positive effects, so that the customers could request a prescription from their doctor.
-
Collaboration with key fitness trainers. CSP needs to identify key fitness trainers and secure collaboration with them. The agreement should include Metabical's promotion to the trainer's customers in return for commission rates or a fixed payment. The trainers' promotion can be face-to-face or as an opinion article in their respective websites.
-
Promotion using dietitians – CPS should try to promote Metabical to dietitians since probably many of the target audience can afford them on a regular basis. The dietitians can make the customers aware of the new drug and its results, especially with a healthy eating habit. The promotion can be done by setting up attractive free conferences with Metabical's drug introduction as one of the key lectures.
Promoting to all US overweight individuals that actively try to lose weight
-
Promotion with the pre-portioned packaged food delivery services. The company can collaborate with these delivery services in the following way – the delivery services can advertise the new drug as a safe way to lose more weight and in return, Metabical's introductory package can include a set of coupons for the pre-packaged food delivery service, that will be subsidized by CSP. This will also increase Metabical's positive effect on the consumer since the drug is more effective with healthier eating habits.
-
Promotion with weight management support programs. The company can collaborate with the weight management support programs and emphasize that the drug is most effective when behavior modification and healthier eating habits.
-
On-line/Newspaper advertising – CPS needs to identify key opinion makers (bloggers, magazine column writes, etc.) in the weight-loss industry. These people help formulate the public opinion regarding various diets and weight loss tips. CPS should try to promote Metabical to them using whitepapers of the research results and/or monetary incentive.
Place
The channels of distribution are various pharmacies and the manner of distribution is similar to other CPS drugs.
Price
According to our proposed pricing model, we propose to sell both introductory and refill packages of the same brand at the same price. However, the price of the packages between the brands should be different:
Bibliography
- American Religious Identification Survey (ARIS 2008) by Barry A. Kosmin and Ariela Keysar (March 2009)
- Prevalence of Overweight, Obesity, and Extreme Obesity Among Adults: United States, Trends 1960–1962 Through 2007–2008, by Cynthia L. Ogden, Ph.D., and Margaret D. Carroll, M.S.P.H., Division of Health and Nutrition Examination Surveys (June 2010)
The case is timed in April 2008
Please refer to attached excel file for price seeking calculations.
Demand forecast #2 it is more conservative than demand forecast #1 thus lowering the uncertainty.
צריך להדגיש את העניין של VTC, שבפועל ההשקעה מחזירה את עצמה בתשלומי בריאות תוך שנה בלבד!
צריך לעשות משהו על הניסוח המעפן פה
אולי לתת מחיר גבוה יותר וקופון שבסוף יצא אותו מחיר?