Last week Pfizer announced increases in the list prices of more than 40 drugs for the second time within the year. The increases average 9.4%. Although there could be some political backlash, the pricing strategy is logical. Pfizer is recognizing their pricing power, they are incorporating buyer psychology into their process, and they are taking steps to avoid shocking or angering their customers.
Pricing power is the ability to raise prices without significantly affecting the demand for a product. In Pfizer’s case, they have data that show patients clearly want their drugs, and they know modest increases will not reduce demand. Although nearly all the drugs involved in this latest round of increases have competitors, people prefer to stick with something that works for them. There is value in continuing to use something that is effective, rather than testing alternative drugs.
There are multiple layers to the buyer psychology. The customers with whom Pfizer and other pharmaceutical companies deal are primarily insurers and PBMs (Pharmacy Benefit Managers). As they compete for their own customers, one of the main selling points of insurers and PBMs is how large a discount they obtain from healthcare providers. Their sales pitches do not tout the net price per pill or per service; they claim to save customers money by obtaining bigger discounts. Pfizer and others know that when their customers are focused on the discounts, there is much less focus on the list prices.
Pharma companies also realize that when we get to the actual patients, many are even less focused on the list price of medicine, because it does not affect them. A huge proportion of medical insurance plans require a flat co-pay for each prescription. The patients have a fixed fee, such as $10 or $20 for each medicine. If the price of their drug goes up, their co-pay remains constant. There is no market signal to the patient and no resulting impact on their demand.
Another layer of the psychology is that even high-deductible customers do not always know exactly how much they pay. For example, I may know the general range for a gallon of gas or a dozen eggs, but I only know the exact price when I compare prices. If I paid $3.10 for gas last week and it is $3.30 this week, I may not notice the price has increased. I will probably notice it if other stations in the area are still charging $3.10 and my preferred station is the only one charging more. Even if I notice the difference, I still may not change gas stations. Similarly, for drugs that I buy only occasionally, or even once a month, there is a reasonable probability I would not notice a small price increase, even if I do not have a co-pay and I am paying for all of it. It is only when I view other drugs as equal substitutes and I am actively comparing prices that I would notice.
I wrote a blog post in 2016 about minimizing risk, Increase Your Prices Without Angering Your Customers. One of my points was huge price increases shock and anger customers, and they should be avoided. In Pfizer’s most recent price changes, they have sought to avoid a backlash by keeping their increases modest. With general inflation running at slightly more than 2%, and overall healthcare inflation much higher than that, a 9% price increase does not seem outrageous. It does not appear to be gouging.
There is no doubt the cost of healthcare continues to increase faster than the cost of most things, with the possible exception of a college education. The price of drugs is often cited as a leading cause of the high cost of healthcare, and that leads to political pressure on the pharmaceutical companies. Rather than becoming defensive or overly timid, Pfizer’s pricing strategy takes a very logical approach and capitalizes on their pricing power and the behavioral dynamics in their industry, and it minimizes risk. We can all learn something from that.
Leave a Reply
Want to join the discussion?Feel free to contribute!