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Henning

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3

Wild Card question: How would you price a COVID 19 vaccine?

Your company have just developed a new vaccine for COVID-19 and has passed the final testing round. How would you price it?

Assume your company is based in US. All other variables are the same as real life.

It seems there can be many market sizing + pricing strategy elements weaved in this case, and I am thinking of a structured way to approach it - especially given our objective is probably not maximising profit (ethnical consideration), and we might be able to sell to government which has a budget constraint as well.

Your company have just developed a new vaccine for COVID-19 and has passed the final testing round. How would you price it?

Assume your company is based in US. All other variables are the same as real life.

It seems there can be many market sizing + pricing strategy elements weaved in this case, and I am thinking of a structured way to approach it - especially given our objective is probably not maximising profit (ethnical consideration), and we might be able to sell to government which has a budget constraint as well.

(edited)

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You are on the right track! Make sure you bring up ethical concerns, as well as constraints regarding government funding. Govs might have funded the development and are requiring you to not price per potential, but at production costs.

Then state that if this is a true question for value based pricing, you would proceed as follows and lay out a structure to estimate value to receipients, also considering potential competitors moving in quickly that you need to benchmark against.

Lastly, state that beyond the ethical imparative and gov constraints, there might be a potential reputational damange if you actually should price to value that might hurt existing business after a public outcry. This looks very much like a question with a high risk of falling into a trap and you should overinvest in covering your back.

You are on the right track! Make sure you bring up ethical concerns, as well as constraints regarding government funding. Govs might have funded the development and are requiring you to not price per potential, but at production costs.

Then state that if this is a true question for value based pricing, you would proceed as follows and lay out a structure to estimate value to receipients, also considering potential competitors moving in quickly that you need to benchmark against.

Lastly, state that beyond the ethical imparative and gov constraints, there might be a potential reputational damange if you actually should price to value that might hurt existing business after a public outcry. This looks very much like a question with a high risk of falling into a trap and you should overinvest in covering your back.

Thanks, that's very insightful. I have a follow up question: How do we structure the tree? I was thinking 1) Define objective 2) Explore price under value/cost/competitor based pricing 3) Choose one pricing strategy given our objective. But it seems after we defined our objective (for example, not revenue maximisation but to establish a ethical brand image), then it seems we cannot price by value but better to go with cost. In this case should I still go through the value creation discussions? Another problem I have is how to price based on cost - normally in the COVID case, my approach is - aim to recover R&D in 2 years, assume a $xxx mn of Fixed cost and $xx Variable cost, then assume a coverage of 10% population each year (given capacity), with COVID disappearing in around 5 years (when the vaccine will no longer make money). Do you think it is reasonable? Kind of feel it's too simplistic... — Anonymous A on Oct 08, 2020

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Eek. You have two very poor assumptions (sorry).

1) "Especially given our objective is probably not maximising profit (ethnical consideration)". You are wrong here.

All companies have the objective of maximizing profits. All companies have the incentive to PRETEND that they don't.

If you do some reading, you'll see that a lot of these promises by vaccine companies to keep prices low only go until July, 2021...when less than 10-20% of the developed world population will likely have been vaccinated. These companies still want to make money

2) "The government has a budget constraint". Not at all! The government has tons of $ to throw at this problem! Operation Warp Speed threw billions at this. Heard of Kodak? Heard of their $765 Million Dollar Moment? So, the US government does not have a budget constraint in anything that involes 1) Public image (i.e. pandemic) and 2) Military

Sorry to burst the bubble there!

Now, given this news, you now know the objective is to maximize profits without appearing to in the context of a government willing to pay a lot. How does this change your framework :)

Clarifying questions are key here!

Eek. You have two very poor assumptions (sorry).

1) "Especially given our objective is probably not maximising profit (ethnical consideration)". You are wrong here.

All companies have the objective of maximizing profits. All companies have the incentive to PRETEND that they don't.

If you do some reading, you'll see that a lot of these promises by vaccine companies to keep prices low only go until July, 2021...when less than 10-20% of the developed world population will likely have been vaccinated. These companies still want to make money

2) "The government has a budget constraint". Not at all! The government has tons of $ to throw at this problem! Operation Warp Speed threw billions at this. Heard of Kodak? Heard of their $765 Million Dollar Moment? So, the US government does not have a budget constraint in anything that involes 1) Public image (i.e. pandemic) and 2) Military

Sorry to burst the bubble there!

Now, given this news, you now know the objective is to maximize profits without appearing to in the context of a government willing to pay a lot. How does this change your framework :)

Clarifying questions are key here!

(edited)

Hi Ian, thanks so much for pointing them out - it actually makes a lot of sense. In this case, I could probably think of a few pricing strategies (like price discrimination, of offering low price for basic vaccine and charge a very high price for more effective ones, or to negotiate a packaged deal with government where the vaccine is priced lower but additional services has a high price. Just some thoughts that I currently have.) But I'm wondering how I could approach this question and probably evaluate these options in a structured way, instead of just throwing ideas here, given there is a lot to consider. Thanks again for answering my question in the first place! Hope to hear your opinion on this as well. — Anonymous A on Oct 08, 2020 (edited)

Hi there! Yes, a lot of these things just require practice and reading to better understand :) — Ian on Oct 08, 2020

So, right now you have a lot of "ideas". Great ideas, but unstructured ones as you've pointed out! Fundamentally, you're evaluating what ideas will make the most profit while ensuring good PR/reputation. — Ian on Oct 08, 2020

Your structure could honestly be done in many ways...this one is very subjective. So, you could have 1) Determine pricing method (cost v value v benchmarking) 2) Determine level of pricing based on method 3) Look at logistics of implementing — Ian on Oct 08, 2020

Or, it could be 1) Market / Customer identification (could be clarifying Q too...gov will buy) 2) Determine WTP (willingness to pay) 3) Evaluate appropriate % of WTP to charge in order to maintain good PR — Ian on Oct 08, 2020

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Hello!

Usually you initially approach all pricing cases the follwoing way, triangulating between:

  • Break even
  • Willingness to pay
  • Benchmark to competition

In this case, the important one is the calculation of willingness to pay.

Hope it helps!

Cheers,

Clara

Hello!

Usually you initially approach all pricing cases the follwoing way, triangulating between:

  • Break even
  • Willingness to pay
  • Benchmark to competition

In this case, the important one is the calculation of willingness to pay.

Hope it helps!

Cheers,

Clara

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