I have written a number of blog posts about pricing strategies and business strategy in general. Setting strategy is fundamentally about making choices regarding where you compete and how you win. A very important part of making those choices is understanding how those choices affect other market constituents over a longer term. More specifically, considering and understanding the likely reactions of customers, competitors, potential competitors and regulatory groups is required to ensure business and pricing strategies are durable.
Earlier this year I wrote an article, Don’t Make Your Customers Angry, discussing the case of Turing Pharmaceuticals who had raised the price of Daraprim from $13.50 to $750.00, an increase of more than 5000%. There were immediate outcries of price gouging from customers who take the anti-malarial and HIV drug, insurers, doctors and politicians. In the wake of the backlash, Turing originally reversed course and agreed to return the drug to its previous price. Turing then reversed course again and decided to keep the drug at the higher price. Turing’s customers – patients, doctors, and hospitals all remain angry with Turing. The customers may not have any alternatives in the short term, but they are likely to remember the anger.
Just last week, the New York Times reported that Express Scripts was planning to announce that it will promote use of a compounded medicine that contains the same active ingredient as the Turing drug, Daraprim. Top Prescription Plan to Offer $1 Alternative to $750 Pill. I don’t know how profitable Daraprim had been prior to Turing’s price increase, but it certainly became a lot more profitable after the increase. And even though it is not a huge market, the much higher price and profitability were certain to attract new competitors. Now with new competitors and angry customers, Turing is likely to lose significant market share. The much higher price will offset the lost market share for a while, but for how long is questionable. Did Turing consider that before making the move?
In addition to customer and competitor reactions, politicians and regulators generally want to be seen as protecting consumers; and they often take action when their constituents are upset, or when they perceive a market imbalance. For example, consider Microsoft and the Internet Explorer browser in the late 1990s and early 2000s. At the time, Microsoft was the most valuable tech company in the world. In a move to gain share in the browser market, Microsoft included Internet Explorer in a bundle with its Windows operating system. In The United States v. Microsoft Corp, the Justice Department accused Microsoft of abusing monopoly power by bundling the browser with Windows. The company spent huge sums of money defending their actions and ultimately settled with Justice. The settlement included exposing their Windows APIs to third parties so they could easily integrate other browsers. Today Mozilla Firefox and Google Chrome have the dominant shares of browser use, dwarfing the use of Internet Explorer.
Turing is not comparable to Microsoft, but their pricing actions have certainly attracted the interest of regulators and politicians: Hilary calls Rx price ‘outrageous’, vows action. In addition, The New York attorney general launched an investigation into the company’s drug-distribution practices and whether they violate antitrust laws. Sen. Bernie Sanders (I-VT), a Democratic presidential candidate, and other lawmakers have also requested that the company turn over information about its drug-pricing practices. This regulatory attention ensures that Turing will need to devote significant resources to defending the company’s pricing practices and providing detailed information to regulators. It also ensures that customers will continue to be reminded of Turing’s huge price increase, preventing the anger from dying down.
I have written repeatedly that I favor setting prices according to the value provided by the products or services being sold. This blog is not a contradiction to that view. It is, however, a caution to consider the long-term consequences of strategic choices. Satisfied customers will generally not switch products or providers for small price differences, but huge price increases can destroy customer satisfaction. Companies should not set their prices in fear of losing business to competitors, but they need to avoid precipitous moves that widen the opening for the competition. Finally, politicians and bureaucrats love to find perceived wrongs which they can correct. Large price increases and very high profitability can provide the targets politicians love.
As you set pricing strategies and make choices, take logical steps that consider the potential future reactions in the market. Be careful of generating near-term profits that erode your business over the long term.
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