After getting raked over the coals by Congress earlier this year, Mylan is preparing to release a generic version of their EpiPen, Mylan To Start Selling $300 Generic EpiPen Pack Next Month. The price of the generic will be roughly half the price of the brand name EpiPen. That raises obvious questions like, “How will the generic impact the sale of the EpiPen?” and “What will happen to Mylan’s profitability?” Although the Mylan issue is a bit extreme, these are similar questions to those that must be answered by any company whose pricing strategy includes offering a generic version of their product or an introductory level version of another product. All of the strategic aspects of introducing a low-priced offering must be explicitly considered and planned.
Customers are not all the same. They have different levels of price sensitivity and often experience different levels of value from a given product. The whole point of segmentation is to identify which customers fit into logical groups with common levels of value and common levels of price sensitivity, and then create offers that fit each segment. We see it with automobiles, such as Mercedes which offers an entry level, middle tier, and premium tier of their 4-door sedan. We also see it in HP laptops with devices aimed at basic users, gamers, power users, and multiple steps in between. The products in the lineups of Mercedes and HP have a range of prices and a range of features to address multiple customer segments.
An important point is companies introduce 2nd, 3rd, and 4th versions of products to capture additional customers. If a company’s first version of a product starts at the premium end, future versions are likely to be descoped versions to appeal to customers who are currently not buying. The purpose of the reduced-price version is to capture more price-sensitive customers, or those who do not need all the features of the original, not just to lower the price for existing customers. Conversely a company who starts at the lower end of the spectrum would offer a premium version to meet more advanced customer needs and capture premium prices.
The next important point in these lineups is the products are not simply the same thing with different names. There must be differences. The highest end products have features that add more value compared to the lower level products. The manufacturers communicate those extra features and the additional value to customers and prospects, along with communicating the higher prices.
Generic items market themselves as products that provide the same value as the brand-name products, but at a lower price; and brand names compete by touting their quality, reliability, safety, and special features. In other words, not the same thing. Mylan appears to be trying to market their generic EpiPen by saying it is the same thing as their own brand name drug. If customers perceive a Mylan’s generic product is identical to the brand-name product, a large percentage of those customers will simply switch to the generic version. That will significantly reduce Mylan’s revenue.
For any company looking to expand their customer base by offering a generic or entry-level product, they need to address:
- How large is the market for a generic version of the product?
- How many existing customers are likely to switch to the lower-priced version?
- Can we articulate the differences between the premium product and the generic product in a way that demonstrates value?
- How many new customers are likely to be captured with the new product?
- Does the profit increase from new customers offset the profit decrease from customers who simply switch to the lower-price version?
- How are competitors likely to react?
In Mylan’s case, there were already many complaints that potential customers had been priced out of the market and could not buy EpiPens. In addition, a new competitor will be entering the market, and the new competitor will likely capture some existing Mylan customers and compete for the more price-sensitive customers. So, Mylan needed to act.
For most of Mylan’s existence, they have manufactured generic drugs and sold them as equivalent to the branded versions. With the very large price increases they implemented, they should also have been planning for a path to address the more price-sensitive segments. Without some identifiable differentiation, customers will know that their new generic EpiPen is the same as the branded product. I expect the revenue and profit from EpiPens will fall dramatically. More modest price hikes and better planning could have avoided the coming profit decrease.