A company launching a consumer healthcare brand goes through a fairly rational internal process for brand pricing decisions. Pricing strategy is an important part of the overall Brand strategy that is finalized after great deliberations internally.
Inputs are obtained from both – the external sources related to competitive pricing scenario, and internal sources for material and process costs, and other overheads. In the case of OTC medicines that fall under the DPCO list of price-controlled drugs, details are also sought regarding the specific price capping for each SKU planned for the brand. The brand pricing is also dependent on the prevalent pricing of the competing brand that this company’s brand is positioned against.
The first step in the process is that the Manufacturing & Commercial teams share their estimated costs with the brand cost accountant who prepares a brand cost sheet. Based on expected gross margin, the Finance team recommends a suggested price for each SKU of the brand, on the assumption that all costs will be recovered, and the planned gross margins are also to be achieved.
At this stage, one could safely assume that the costs obtained are based on some assumptions. The Commercial team would have obtained costs from vendors without considering economies of large scale, as the initial volumes indicated would have been relatively low. The Manufacturing team would probably have factored in various exigencies and obtained a final buffered cost. So, truly, the brand price that is recommended at this stage is higher than what it would have been with better efficiencies in sourcing or manufacturing. .
From al consumer healthcare brand point of view, it is important for the company to have adequate gross margin as a % of sales. With heavy marketing, sales and distribution expenses required for any company to succeed, it is important to generate, at least 70% to 80% gross contribution consistently. And, during the initial period, it is important to spend what it takes to be successful in the market, so the returns are usually negative.
The Brand Manager then considers the recommended brand price, and compares it with competitive brand prices. If it is a new product in the market, the Brand Manager adopts either a “Skimming the market strategy” with a high entry price, or a “Market penetration strategy” with a lower affordable price, than what is recommended. Prices are yet to be finalized, and the Brand Manager comes up with a suggested price.
It is at this stage that there is a need felt to check whether the market would find the brand price acceptable – the way it was envisaged internally. There are various ways of checking this out – formal market research methods, as well as informal discussions with consumers and trade. There may be a significant conclusion that the price is inappropriately high for the market.
Here’s where the pragmatism of the Brand Manager plays an important role. He needs a significant cost reduction to be able to make the pricing most acceptable. If internal negotiations do not yield significant cost reduction, then the Brand Manager needs to think laterally too. Without compromising on the quality of the product, he needs to see if there are cost reduction possibilities. Some aggressive re-look is definitely what needs to be done. If required, the brand manager needs to set a target end price for the consumer. Working backwards with the expected gross margin, it will be clear what the estimated cost per piece needs to be. The Manufacturing and commercial team can then come back with their recommendations for immediate action to attain those cost reductions, without compromising on the product concept and product quality. Thus, if the price is higher than what the market can possibly bear, this aggressive action will bring the brand to the consumer at an acceptable price.
After all the efforts as above, if the acceptable price then yields a gross margin less than 70%, in the case of consumer healthcare brands, would be advisable to go back to the drawing board, and re-look at everything in the brand plan. No point launching the brand in a situation where the company would not be able to support the brand for a reasonably long period. At this stage, some may voice the futuristic hope that “once the brand does well in the market, we could take price hikes later”, but history has shown that such hopes are often belied.
So, pricing a brand needs to be carefully planned. It is said, “Price is what you pay, and Value is what you get”. Whatever be the pricing decision, it is the consumers in the market who will be the ultimately judge whether the brand is worth paying the price for. The brand will sell well only when, mathematically, the Value consumers get on buying the brand truly exceeds the Price they pay.