It’s 2020’s Holy Grail: the coronavirus vaccine. Large parts of the country and the world are shut down in a deadly pandemic. Scientists around the world are racing for a vaccine to end the suffering and re-start the economy.
Let’s say you found it. After 9 months of hard work, you have the answer to the world’s problems. What do you charge for it?
(Unlike most strategy and pricing questions I pose, there isn’t what I believe to be a “right” answer. This post is a framework for you to think about pricing in general. In all likelihood, you’re not developing a vaccine. But, if you do, I’ll help you think through pricing in exchange for a lifetime supply of your vaccine.)
Some factors to consider:
- What is the value to the customer?
- What is the cost of developing and producing the vaccine?
- How quickly am I delivering it?
- What’s the frequency of use?
- What impact does the pricing have on my brand?
- What are the regulatory impacts?
- How does this affect other products I have?
No doubt the value is here. At a country level, we should be willing to pay $1 trillion — we’re spending more than that in the current bailout and recovery packages, with an unknown amount of misery to go. From an overall health of the country and the economy, the government should write a big check that covers all 350 million people.
It’s when it comes down to consumer pricing, it becomes a lot tougher, In this scenario, I’d be willing to write a check for $100,000 to solve this for me and my spouse. Some would pay more; most could only afford a fraction of that. In economic terms, this is largely a price inelastic good. But I don’t get any meaningful benefit unless the bulk of the population is immune. (You can’t go to restaurants, go to a bar or get a haircut.) The price needs to be set so that the average person can buy it.
This is different from a drug like Sovaldi, where a 1-month, $28,000 treatment can cure you of Hepatitis C. There aren’t dependencies on the behavior of the rest of the population.
Cost of development
Cost + margin is a common (and lazy) way to develop prices.
In the case of drugs, the first pill costs you $2 billion and the next one costs you 5 cents.
The cost of R&D is less material if you’re Pfizer than if you’re a biotech startup. Pfizer might want to do it at a loss for other reasons; a startup that may only have one big drug in its lifetime needs to price differently.
One of the challenges in pricing is that people assume that if something takes longer, it is worth more. Clearly it involved more effort. So it’s “fair” that you charge me more. That’s how most industries work and how employees generally work.
In this case, a solution today is much better for society (and the individual) than a solution 6 months from now.
I would pay a higher “delivery” fee for my meal if it showed up immediately in my apartment versus waiting 45 minutes for it. But that’s not how most people think about these things.
Frequency of use
If one use cures or prevents the disease, then the pricing should reflect the lifetime value because you have to get it all up front. See the Sovaldi example earlier.
On the other hand, if you need to use it weekly or monthly, you can charge less because you have a long term revenue stream.
Depending on your pricing strategy, you could have a positive or negative impact on the brand. Some people say that if Pfizer discovered a vaccine, they should give it for free immediately to everyone because they would be remembered forever as the savior of the world.
But does the brand matter? In the case of drug companies, it really doesn’t, for two reasons. First, very few people know what companies make what drugs. Without Googling, what drugs does AbbVie make? Even if you do Google it, the first page of results don’t tell you what it makes. (You have to click on a link.)
The second is that pharmaceutical companies have a monopoly on the branded drugs they make and someone else gates what you purchase. Your doctor is going to prescribe
whatever drug the hot pharma sales rep who took him to lunch told him about the drug that is the best for your condition.
There will be some initial PR blowback, but in the long term, it won’t matter. This is partly how doses of insulin cost hundreds of dollars – and the price keeps going up – despite the fact that the patent for insulin was once sold for $1. Eli Lilly, Novo Nordisk and Sanofi just don’t care what you think of their brands.
The brand impact matters more if you’re Target, Walmart or Pepsi.
For a coronavirus vaccine, this is probably the biggest constraint on pricing. Charge too much and the government may pay the bill to get the pandemic under control and then start probing every other aspect of your business.
In some cases, some governments will say, “Screw you and your patent. We’re going to make it ourselves.” This is especially true of developing countries. In a pandemic, this isn’t a hard decision to make.
Impact on other products
“This is an important life-saving drug and everyone should get it for free.”
Well, that may be true. But there are a lot of life-saving drugs. Do you give all of the life-saving drugs out for free and only make your profits on the quality-of-life drugs?
Have you undercut your entire business and the way people think about healthcare? (Leave aside the issue of whether pharmaceuticals should be a for-profit business.)
As I said at the beginning, this is not a guide to pricing your coronavirus vaccine. But these principles apply in pricing most things. As tech becomes a much deeper part of society, we’ll have to pay more attention to regulatory impact than we have so far.
For most products, competitive pricing will also matter.