Towards value-based pricing—An integrative framework for decision making

When Demand Projections are Too Optimistic: A Structural Model of Product Line and Pricing Decisions

Given the high costs of innovative new drugs, most countries have introduced policies for price control. Two policies have become popular in recent years: international reference pricing (IRP) and value-based pricing (VBP). Another policy that was recently introduced in Germany consists of price negotiations between payers and manufacturers followed by IRP and VBP in case of no agreement. These policies are usually preceded by an assessment of medical benefits against current standards (e.g. in France [3] and Germany [1]) and thus are only applied in case evidence for medical benefits exists. IRP is ‘‘the practice of using the price(s) of a medicine in one or several countries in order to derive a benchmark or reference price for the purposes of setting or negotiating the price of the product in a given country’’ [4]. In some countries, the referencing pricing system is applied rigidly, while in other countries, it is simply one of many elements of information used to inform the pricing decision [4]. By taking comparison prices from other countries, the regulation of drug prices in one country can directly affect prices in another. A recent review [5] showed that among the 27 European Union (EU) Member States only four countries did not use IRP in 2010 (Denmark, Germany, Sweden and the UK). Among the EU countries using IRP, the most commonly used method was to take the average of the country basket [5]. Bulgaria, Greece and Norway took the average of the three lowest countries [5]. In contrast, VBP sets drug prices based on the value they provide. The fundamental principle of the VBP approach is that the costs of drugs (including savings from avoiding morbidity) should not exceed their health benefits. VBP thus is also applied in pay-for-performance agreements when performance is measured based on value. VBP is based on an implicit or explicit decision rule, which compares the incremental cost-effectiveness ratio of a drug with a threshold willingness to pay, e.g. £20,000 to £30,000 per QALY gained in England and Wales [6]. This threshold willingness to pay is sensitive to ethical values and may increase with unmet need (e.g. in England and Wales for patients with a short life expectancy [7]). The purpose of this paper is to show that IRP (possibly followed by price negotiations) or price negotiations followed by IRP and VBP in case of no agreement are not sustainable in the long run and will lead to VBP. As a word of caution, the argument is only made with respect to innovative new drugs and not me-too drugs with no

Industrial Pricing Orientation: The Organizational Transformation to Value-Based Pricing

Joint pricing and inventory decisions for substitutable and perishable products under demand uncertainty

Barriers to implementing value-based pricing in industrial markets: A micro-foundations perspective

This paper considers the pricing decisions of substitutable products which are produced by duopolistic manufacturers respectively and then sold by one common retailer to the consumers. Both the manufacturing cost and the customer demand for each product are characterized as fuzzy variables. Six expected value models are developed to explore the effects of the duopolistic manufacturers’ three pricing strategies (i.e. Bertrand competition, Stackelberg competition, cooperation) and vertical competition between the manufacturers and the retailer on the optimal pricing decisions and channel profit-split of a two echelon supply chain, and the corresponding analytical solutions are derived. Finally, a numerical example is given to illustrate the effectiveness of the proposed models, and to gain additional managerial insights.

Remanufacturing is a product recovery process that transforms a used product into “like-new” condition. It can extend the useful life of a product and help in reducing waste caused by a huge amount of short life-cycle products. Pricing decisions are an important aspect of successful remanufacturing and can secure the profitability of a firm. Remanufacturing for end-of-use products needs to cope with high uncertainties in terms of the quality and quantity of the acquired product returns. Therefore, after inspection, only a fraction of returns can be recovered through remanufacturing operations. This uncertainty in recovery yield influences the decisions impacting acquisition, wholesale, and retail prices. We propose a pricing model that accommodates the random yield effect of product returns on pricing decisions for short life-cycle products in a closed-loop supply chain. The system consists of a retailer, a manufacturer, and a collector of used-products. We apply a sequential decision approach to determine the optimum pricing decision to maximize supply chain profit, according to a pricing game that places the manufacturer as a Stackelberg leader. We demonstrate the effect of changing parameter values on the wholesale and retail prices as well as on the profitability. The results indicate that the profitability of each player and the supply chain as a whole is affected by the quality of the collected used products, the acquisition price, the shortage penalty, and the remanufacturing costs. Interestingly, reducing variance of random yield results in lower profit for the collector even though the other players and the whole supply chain are better off.

Beyond Plain Vanilla: Modeling Joint Product Assortment and Pricing Decisions

The Fast-Moving Consumer Goods (FMCG) industry in Indonesia faces intense competition, making it essential for firms to understand the drivers of consumer purchase decisions in tier‑3 markets such as Pati Regency. This study examines the effects of promotion, price, and consumer attitude on purchase decisions for Kao products, with brand image as a mediating variable. Using a quantitative explanatory design, data were collected via questionnaires from 100 purposively selected consumers who had purchased Kao products in the previous six months, and analyzed with PLS-SEM. The results show that promotion, price, and consumer attitude each have a positive and significant effect on brand image, and that brand image positively influences purchase decisions. Promotion and price also have significant direct effects on purchase decisions, whereas consumer attitude affects purchase decisions only indirectly through brand image. Mediation analysis indicates partial mediation for promotion and price, and full mediation for consumer attitude. These findings underscore the central role of brand image and suggest that Kao should align promotional activities, value-based pricing, and attitude-building programs to reinforce brand image and strengthen purchase decisions in Pati Regency.

PurposeThe purpose of this report was to evaluate the effectiveness and practicality of system dynamics modeling in integrating econometric equations to describe the effects of supply chain material and information delays on pricing decisions and consequent financial results in an animal feed export business.Design/methodology/approachAn empirical dynamic model, loaded with econometric theory of price effect on competitive demand, was used to describe the input data.FindingsThe model simulation outputs proved themselves relevant in analyzing the complex interconnections of multiple variables affecting the profitability in a commercial routine, supporting the decision process among sales managers. The impact of information delay on price decisions and business financial results were estimated using the model proposed.Originality/valueThis paper describes an empirical model, based on system dynamics, that predicts operating contribution margins and cash conversion cycles based on estimation of information and material delays in a supply chain. The method is pragmatic and simple for business routine implementation.

PurposeExternal factors such as improper handling, extreme weather and insect attacks affect product quality. It is most obvious in fruit products which have a high deterioration rate. Moreover, decaying fruits will increase the deteriorating of other good ones. The purpose of this study is to derive the optimal pricing and replenishment decisions for agricultural products considering the effect of external factors that induce deterioration.Design/methodology/approachIn this paper, the study investigates ways to reduce the product deterioration rate by separating the near defective items from the other good products and accelerating the quick sales of the near defective items at a discounted price. The objective is to maximize the total profit by optimizing the selling price and the replenishment cycles. Two scenarios are investigated. In the first scenario, the retailer offers a selling price discount for near defective products to stimulate customer demand. In the second scenario, the retailer does not offer such discounts.FindingsAn algorithm to solve the model is derived. Further, numerical examples are developed to compare the total profit for the two scenarios. Theoretical derivations and graphical results show the concavity of the profit function. Finally, the sensitivity analysis shows that the total profit of the discount model is higher.Originality/valueThis study contributes to a new pricing and inventory decision model. The research provides insights to retailers on making optimal pricing and replenishment decisions for non-instantaneous deterioration items, as well as reducing the external factors that influence higher deterioration rate through separating good products from the near defective ones which are sold at a discount to induce the sale.

This study explores the pricing decisions of substitutable products for two competing supply chains in the presence of an online channel. Each supply chain consisting of a single manufacturer and an exclusive retailer and one of the manufacturers distributes products through the online channel. We examine optimal decisions under five scenarios to explore how the strategic cooperation between two manufacturers at the upstream horizontal level or with the retailer at the vertical level affects product pricing decisions and the performance of two supply chains? The results reveal that decisions for cooperation with competing manufacturers and opening an online channel are correlated. In the absence of an online channel, cooperation with their respective retailer can lead to a higher supply chain profit. However, if a manufacturer opens an online channel, then cooperation with competing manufacturers can lead to a higher supply chain profit. Under the vertical integration, total supply chain profit might be lower compared to a scenario where members in each supply chain remain independent. Consumers also need to pay more for products.

Product quality and pricing, as the important competitive tools, play a key role in attracting consumers. In a supply chain, the decisions on product quality and pricing are usually interlinked and would influence the cooperation relation between the members, especially when they are fairness-concerned and have different bargaining power. However, linking the quality and pricing decisions to the decision-makers’ behavioral factors such as fairness concern draws a little attention in the literature of supply chain management. This paper incorporates the members’ fairness preference and bargaining power into the product quality and pricing decisions in a two-echelon supply chain, where the supplier offers core components with a certain quality level to the downstream manufacturer, who subsequently sells the final products in the end market. Both the supplier and the manufacturer are assumed to be fairness-concerned by adopting Nash bargaining solutions as their fairness reference points. We use game-theoretic models to analyze the equilibrium product quality and pricing strategies under the setting of integrated and decentralized supply chain, respectively. Detailed comparisons and sensitivity analysis are further conducted to examine the impacts of members’ strengths of fairness concern, bargaining power, and decision structure on their equilibrium product quality and pricing strategies and corresponding payoffs.

Product bundling and pricing strategies can be effectively deployed to reduce the firm’s fixed complexity costs in product development, sourcing, manufacturing and distribution logistics and to raise consumer prices. In addition, the introduction of new and innovative product features may allow firms to raise both expected sales and consumer surplus, consumer satisfaction respectively, measured by the difference between the customers reservation price and the respective market price of the product. In general, when customer segments are very heterogeneous, then a mixed bundling or mass-customization strategy may dominate a free-choice or pure bundling strategy in terms of expected sales. This is due to the fact that the structure of micro-markets can be directly exploited. Contrary, the two other strategies can be viewed as mass production strategies, since they can not effectively exploit the willingness-to-pay of attractive micro-markets. Development of new and innovative product features can create a real option value for the firm, since it enables it to capture additional markets or market share. Utilizing a real options approach for (incremental) product development, we show that the firm’s downside risk can be curtailed due to the option to abandon the project. In general, the benefit of introducing new product features must be traded off against the possibility of market reactions by competitors and the development costs and improvement costs prior to market launch.In this paper, we analyze the firm’s option to introduce a mixed product bundle for mass customization as opposed to a free-choice or pure product bundle policy for mass production. Moreover, the introduction of the new product can be abandoned contingent on both market and project information. In addition, the firm has the option to improve the project periodically, i.e., take corrective action in order to influence the project’s expected payoffs. We show that the option value of the project under consideration can be significantly increased this way and that the decision on the optimal product policy and pricing strategy should be postponed until (close to) the time of market entry.

Product costing in service organizations