Pricing Strategies and Decisions

LEARNING OBJECTIVES

1. How do health care consumers, providers, and companies process and evaluate prices?

2. What are the different methods and seven steps for setting an initial price for a product or service?

3. How should prices be adapted to meet varying circumstances and opportunities?

4. When should an organization initiate a price change?

5. How should an organization respond to a competitor’s price change?

6. What influence do government and private payers have on pricing decisions?

LO1. How do health care consumers, providers, and companies process and evaluate prices?

Reference prices Price-quality inferences Price cues

LO2. What are the different methods and seven steps for setting an initial price for a product or service?

Methods Markup pricing Target-return pricing Value pricing Going-rate pricing

LO2. What are the different methods and seven steps for setting an initial price for a product or service? (cont)

Steps Selecting the pricing objective Determining demand Estimating costs Analyzing competitors’ costs, prices, and offers Deciding whether to use price as a competitive strategy Selecting a pricing method Selecting the final price

LO2. What are the different methods and seven steps for setting an initial price for a product or service? (cont)

To set prices Customers’ demand schedule Cost function Competitors’ prices

Steps Costs set a floor to the price Competitors’ prices and the price of substitutes

provide an orienting point Customers’ value assessment of unique features

establishes the price ceiling

LO3. How should prices be adapted to meet varying circumstances and opportunities?

Geographical pricing - by location Price discount and allowances - ie. early

payment, volume purchases, and off-season buying allowances and discounts

Promotional pricing - to stimulate early purchase

Differentiated pricing - to accommodate differenced in customers, products, and location

LO4. When should an organization initiate a price change?

Increase price to maintain profits Overdemand and cannot supply all

customers Reduce to remain market leader

LO5. How should an organization respond to a competitor’s price change?

Maintain price and profit margin Maintain price and add value Reduce price Increase price and add brands Launch a low-price line

LO6. What influence do government and private payers have on pricing decisions?

Government Congress sets method of payment and rates change over time Centers for Medicare and Medicaid Services administer pricing

schemes Prices set by procedure, product, diagnosis Coding systems in place

Private payers Insurance determines medical expense ratio Consumer is responsible for premium, deductible, co-insurance,

and co-payment

CONCLUSION

Seemingly little logic to health care pricing and distribution

Task of setting prices differs by who is paying

Pricing is adjusted by additional factors Government set many prices Private insurances want to be competitive