Assignment: Behavioral Pricing for Metabical submitted

to
Prof. Saravana Jaikumar

In partial fulfillment of the requirements of the course

Marketing

By
Anand Prakash, 1604004
(PGPX 2016-17)

On
19th Apr 2016

In classical old world economies, prices for products/services were mainly based on the cost of
goods sold and the margin the company wants to make over the COGS. But in todays
competitive economy, customers are the drivers of a firms growth or a products success. And a
Companys ignorance towards the customers willingness to pay; for a product or service, may
lead to potential damages. Customers response towards pricing of a new product/service or
towards increase or decrease in prices for a product/service should always be considered by
managers while deciding the price.
In this report I will try to decide upon a pricing plan for the new weight loss drug Metabical,
for Cambridge Science Pharmaceuticals considering consumers behavioral or psychological
perspective for the different pricing plans and the expected results due to those pricing models.
The few assumptions for this price decision are:
1)
2)
3)
4)
5)

Metabical management has decided to go with the 4 week supply package

The variable cost incurred for producing one unit of a 4 week supply is $ 25.20
The retailers gross margin is 33% (of the retail price)
Forecasting model 1 is considered as the closest one to actual demand
CSP wants to recover its Research and Development Cost ($ 400 mn) and other fixed cost
in the next 5 years

Some behavioral factors that would affect the pricing strategy for MetabicalReference Price: Currently there are other weight loss drugs in the market like Alli. Though Alli
is FDA approved, it is a non-prescription drug for overweight individuals and in some sense it
can be considered as one of the closest competitors for Metabical. The retail price for this drug is
$190 for a three months supply. Similarly there are other OTC drugs that can be categorized as
herbal remedies with a retail price of approximately $300 for 3 months of supplies. For a
consumer a good reference price for Metabical a prescription drug might be $225( for three
months supply).
Customers willingness to pay: There are other products/services that cater to the overweight
population of US. Some of them are - weight watchers (meeting based weight control program,
$120 for 3 months), Jenny Craig (diet and weight control program, including packaged meals
and support, $1250 for 3 months) or gym membership ($245 for 3 months membership).

Considering the above facts, it can be a good assumption that an ideal potential customer looking
to lose weight would compare Metabicals price with the above mentioned prices of different
options available at their disposal. Also considering the fact that Metabical would be the only
prescription drug which would be FDA approved, it would not be wrong to assume that
customers would not mind spending a little more than what they are currently paying for using
other weight losing services. So it would be safe to assume that a customer would be willing to
pay a maximum of $450 (an average overweight person, spends $450 more annually on
healthcare issues than a non-overweight person) for a 3 months dose of Metabical.
Cost based pricing: Average variable cost for one 4 week supply of Metabical turns around to
be $25.20, but including the sunk cost of research and development and other fixed costs, the
average cost per pill would vary with the actual sales. For the sake of convenience, let us
consider the forecasting model number 1 as the closest to the actual sales. As per that model, the
forecasted demand would be 7.6 million (in 5 years) and so the average cost per 4 week supply
would be $85. Considering 33% margin for retailers the minimum selling price for Metabical
could be $113.
Other Cost based pricing options could be
ROI
0%
5%
18%
25 %
30%

Wholesale Price (Approx)

$ 85
$ 90
$ 100
$ 106
$ 111

Retailers Margin
33%
33%
33%
33%
33%

Retail Price (Approx)

$ 113
$ 120
$ 133
$ 142
$ 150

Metabical or any other product cannot be priced below its COGS. So the price has to be above
COGS in order to ensure profitability. As we can see that, the reference price in consumers mind
could be as low as $200 ($67 for 1 month supply), so CSP would have to extensively plan its
promotional activities so as to position Metabical as a unique drug, thus creating a perception in
consumers mind that Metabical is far better than any other options available to them.
Additionally since most of the consumers in the target segment of Metabical are educated well
earning overweight individuals, we can see that they would be willing to pay a maximum of
$450 (i.e. $150 for 1 months or 4 weeks supply). But in order to attract more customers the

company will have to promote Metabical in a way so that the perceived value of product for the
customer should be equivalent of $150.
Focus on Consumer Value: Company can lower the effect of Cost of goods sold through
positioning Metabical as a drug which is of higher value than all other drugs currently available
in the market. One of the major USPs that CSP can rely on is the fact that Metabical is the only
FDA approved prescription drug currently available in market. Also, the marketing team should
promote the fact that there are negligible side effects of the drug.
Keeping in mind all of the above facts, retail price of $ 149 (for a 4 week supply ) would be a
great price to maximize revenue by increasing sales.