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Main Subject - Pricing for Bottom Line Profit
When someone asks you, or you ask yourself, what your “profit” is on a product, on a project or on a job, how do you respond?
To help understand the question better, consider the following theoretical e
To help understand the question better, consider the following theoretical e
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
xample:
You sold your last (remodeling) job for $12,000. You used $4,000 in materials and 250 man-hours of people you pay $20 per hour wages to.
If you were asked what you made on this job how would yo
You sold your last (remodeling) job for $12,000. You used $4,000 in materials and 250 man-hours of people you pay $20 per hour wages to.
If you were asked what you made on this job how would yo
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
u respond? Would you say:
A) $12,000
B) $3,000
C) Other ___________ (fill in)
In the example above:
If you chose A, you equate profit with sales revenue. Hopefully by now, most of us have been
A) $12,000
B) $3,000
C) Other ___________ (fill in)
In the example above:
If you chose A, you equate profit with sales revenue. Hopefully by now, most of us have been
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
cured of that error (but not all of us I’ll bet!).
If you chose B, you equate profit with the difference between sales and direct costs. Direct costs are those that we pay for the materials we sell or i
If you chose B, you equate profit with the difference between sales and direct costs. Direct costs are those that we pay for the materials we sell or i
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
nstall plus what direct labor costs us. In the example, there were $4,000 in material costs and $5,000 in labor costs (250 x $20). The “profit” was, therefore, $12,000 - $4,000 - $5,000 = $3,000.
Really
Really
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
? What about that nasty little thing called overhead?
If you chose C) and tried to fill in another number, that’s interesting because the fact is not enough information is given to answer the question
If you chose C) and tried to fill in another number, that’s interesting because the fact is not enough information is given to answer the question
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
properly!
We have NO IDEA OF WHAT OVERHEAD is in the example above; let alone how to account for it in our pricing.
Components of a Price:
We can build up a price from its components using informatio
We have NO IDEA OF WHAT OVERHEAD is in the example above; let alone how to account for it in our pricing.
Components of a Price:
We can build up a price from its components using informatio
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
already established in our financial statements. A price can be constructed from its four components as follows:
Direct Cost of Materials
+ Direct Cost of Labor (Plant, Construction, Delivery, Commis
Direct Cost of Materials
+ Direct Cost of Labor (Plant, Construction, Delivery, Commis
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
sion or Other)
+ Overhead Absorption (on a proportionate basis to sales) (Indirect Costs)
+ PROFIT
= Sales Price (either unit price or sales dollars)
Normally, we can establish or estimate the Direct
+ Overhead Absorption (on a proportionate basis to sales) (Indirect Costs)
+ PROFIT
= Sales Price (either unit price or sales dollars)
Normally, we can establish or estimate the Direct
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
costs fairly accurately. But what about Overhead? The simple way to do this is as follows:
Go back to your Income Statement and separate costs (if not done by your accountant – and often they aren’t)
Go back to your Income Statement and separate costs (if not done by your accountant – and often they aren’t)
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
into Variable or that which is related directly to sales volume (materials, purchases, direct labor, freight, delivery) and Fixed, typically not related directly to sales volume (Advertising, Computer Ex
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
pense, Insurance, Office Wages & Salaries, Officer’s Compensation, Payroll Taxes, Rent or Mortgage Interest, Telephone, Utilities, Waste Management and others).
Ratio Fixed Costs to Variable Costs (over
Ratio Fixed Costs to Variable Costs (over
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
a reasonable period, say 3, 6 or 12 months). This is your OVERHEAD FACTOR. If the ratio is .25 for example, it simply means you need $0.25 (25 cents) to absorb overhead for every dollar spent on direct
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
costs.
Now, let’s go back to the example above and assume their OHF to be .25 (25%). Further let’s say they are looking for a 15% NET Profit on sales (to match their budget). The price then is:
Direct
Now, let’s go back to the example above and assume their OHF to be .25 (25%). Further let’s say they are looking for a 15% NET Profit on sales (to match their budget). The price then is:
Direct
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
osts - Materials: $4,000
Direct Costs – Labor: $5,000 (250x$20/Hour)
Total Direct $9,000
Overhead Absorption: $2,250 (.25 x $9,000)
Total Costs: $11,250 ($9,000 + $2,250)
Profit $1,
Direct Costs – Labor: $5,000 (250x$20/Hour)
Total Direct $9,000
Overhead Absorption: $2,250 (.25 x $9,000)
Total Costs: $11,250 ($9,000 + $2,250)
Profit $1,
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
985 (estimated)
Price to Make 15%: $13,235 ($11,250 + $1,985)
Profitability Check: Profit%=Profit/Sales=$1,985/$13,235 = 15% √
But they actually sold the job for $12,000, so their real net
Price to Make 15%: $13,235 ($11,250 + $1,985)
Profitability Check: Profit%=Profit/Sales=$1,985/$13,235 = 15% √
But they actually sold the job for $12,000, so their real net
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
profit at the bottom line was = ($12,000-$11,250)/$12,000 = $750/$12,000 = 6%.
But, You Say, I Can’t Price That Way, the Market Won’t Bear It!
Nevertheless, this is the way to relate pricing to bottom
But, You Say, I Can’t Price That Way, the Market Won’t Bear It!
Nevertheless, this is the way to relate pricing to bottom
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
line profit, either actual or proposed. If you can’t achieve the price that results in a reasonable (and budgeted) profit, then you, as owner/CEO/President MUST: lower the cost of your products by bette
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
r purchasing or more efficient manufacturing, lower your overhead, change the markets in which you participate or change the offer (more value).
Just like ignorance of the law is no defense, neither is
Just like ignorance of the law is no defense, neither is
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
lack of knowledge on how to price for profit an excuse to accept low profitability.
The arithmetic above only tells you WHAT you have to do, not HOW. The how is left to your business and marketing plans
The arithmetic above only tells you WHAT you have to do, not HOW. The how is left to your business and marketing plans
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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