Pricing in the Life Sciences
I was recently in Raleigh, NC for the 2017 CED Life Science Conference. Businesses represented there came not only from North Carolina’s Research Triangle but also around the country. I met entrepreneurs, experienced executives, investors, academics, and advisors involved in everything from agrichemicals to medical devices.
It was inspiring to see the companies and projects that people were working on, and I came away with a few thoughts to share.
The Importance of Starting Early
I enjoyed speaking with entrepreneurs who were already selling their product, or close to doing so, about their sales and marketing approach. Many had thought deeply about the value proposition they were offering and in what ways it was an improvement over the status quo.
Some products were designed around lowering the cost to the consumer. Others were about increased convenience. Still more centered on improving health outcomes. The entrepreneurs behind such products had thought carefully and quantitatively about price points, price structures, and their market positioning.
On the other hand, some seemed to have more of a build-it-and-they-will-come stance. The product, to them, spoke for itself. These entrepreneurs were great at reciting product specifications but not at articulating what problem they were solving.
Reassuringly, a substantial majority fell into the first, proactive category. And, unsurprisingly, those were individuals who also seemed to draw more attention from peers and investors. Such entrepreneurs will have a leg up from the beginning.
It is important to think strategically about pricing and position, whether as a startup or an established company. In life science, as in every industry, the customer is king. Running a Van Westendorp study is insufficient, and it is definitely not a replacement for strategy.
Price Isn’t Cost
Life science is a field that perfectly illustrates the idea behind my previous article, that price isn’t cost. Many developments in life science require high fixed costs but very low marginal costs. The marginal costs of software even approaches zero. The price for such products isn’t consequentially low, nor should it be.
While marginal costs may be low, marginal benefits can be astronomical. What is the value a consumer may place on a new drug that softens or even eliminates an otherwise terminal condition? Nearly limitless.
That isn’t to say that prices therefore can or should be limitless, but it does underline the fact that price is determined by the value to the consumer, not the cost to the producer.
Having Little Room for Error
Every industry has its own challenges, but life science is especially tricky because the products and services directly affect two of the most critical components of our lives: the human body and food. This leaves little room for product error.
Pharmaceuticals and some medical devices especially can have long, expensive periods of research and development with no guarantee of efficacy or even regulatory approval. With such large fixed costs, the importance of properly strategic sales, marketing, and pricing is only increased. While fixed costs do not directly affect price, starting in a deeper hole means there is little room for business error as well.
Pricing is one of the first ways that a potential customer will interact with your company, so it pays to get it right.
The life sciences hold some of the best promise for breakthroughs that will dramatically improve the lives of millions. Companies in the field have a tough battle ahead of them, but they can improve their odds (as well as their margins) by taking pricing seriously.