In late 2013, Gilead Sciences released Sovaldi, a drug that can cure Hepatitis C in 90 days when used in combination with other anti-viral drugs. The initial price was more than $1,000 per day, and the total cost of treatment could exceed $80,000. In spite of a 90% cure rate for a disease that previously had low cure rates with longer treatments, many editorials, blogs, and TV segments castigated Gilead and other biotech and pharmaceutical companies as price-gouging profit mongers. Antitrust suit accuses Sovaldi maker Gilead of price-gouging and Gilead is accused of Price Gouging but is There Really a Legal Argument?
Recently a study by a panel of doctors and medical experts who help insurers set policies has determined that the drugs are worth the price – Gilead Pills at $1,000 a Day Are Found Cost Effective. In other words, the patients and insurers get more value from the drugs than they pay for them. Sovaldi is one of the highest selling drugs in the world after just one year. In addition, insurers are expanding the range of patients who can be treated with Sovaldi, further demonstrating that value pricing works.
When customers, insurers and other constituencies complain about your prices and make derogatory statements about your company, it can be unsettling. Nobody really wants to be called names or have their character questioned. Those things also raise fears that sales will be lost and prospective customers will satisfy their needs elsewhere. However, companies that truly engage in value pricing, will have thoroughly quantified how their product adds economic value to each segment of customers and prospects. Those companies will have confidence their prices are appropriate and customers will pay for the value.
In the case of Sovaldi and other antiviral Hep-C drugs, they eliminate the need for much longer, less effective therapies and they have far fewer side effects. Gilead quantified the cost of a full course of treatment with alternative therapies over a patient’s life. Even at $1,000 per dose, the lifetime cost of Sovaldi is much lower than alternatives. At that price, insurers and patients earn a return on their investment in switching from old therapies to the new drug. Equally important, by accepting a little noise and pricing to the point of resistance, Gilead captures some of that value for their shareholders.
Pharmaceuticals are not the only example of seemingly high prices actually delivering value to customers. The price for 30-second TV ad during the 2015 Super Bowl was $4.5 million, nearly 40 times the price of a network ad during regular primetime. While that may seem like a huge premium for a Super Bowl ad, the networks have been able to demonstrate to advertisers, much larger numbers of viewers seeing and remembering the ads. Of course all companies would like to be able to advertise their products for less, but they can also do the math on the number of viewers and the stickiness of their messages and determine they get value from Super Bowl ads.
As another example, consider Major League Baseball agent Scott Boras. He is known as an agent who obtains premium prices for the services of the players he represents. He was the first agent to secure a $50 million baseball contract (for Greg Maduxx) and the first to negotiate a $100 million contract (for pitcher Kevin Brown), but he is probably best known for securing a $252 million contract for Alex Rodriguez from the Texas Rangers in 2000. How does he consistently secure eye-popping contracts for his players? He does it by exhaustively analyzing the strengths of his players and how those strengths turn into wins and fans for their teams. He is able to quantify those values and only when he is able to clearly demonstrate value to the baseball teams do they sign the huge contracts.
Whether you are selling physical products, services, or something else, if you don’t receive any resistance to your prices you are probably selling too cheaply. Your products and services need to offer value to your customers, and your prices need to translate that customer value into shareholder value. If you have done the work to understand how you add value to your customers and have quantified how that impacts your customer’s P&L, you can confidently price your product appropriately. And, like Gilead and Scott Boras, you will be able to demonstrate your value and sell through a little criticism about your prices. Doing less than that is not fair to your shareholders.
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