4 Columbia Business School AMPLE DIALOGU! Interviewer: First, let's discuss the possible ways of framing the client's first question — how should it price this new drug? Interviewee: Well, there are three different methods I can think of: © Cost based pricing ~ set the drug price at cost and add a percentage markup * Value based pricing — set it at what customers are willing to pay * Determine Minimum and Maximum prices Interviewer: Great, now, go through the steps to solve this problem and provide a price to the client. Interviewee: Okay, so let’s try cost based pricing. 1 would assume that the company has both fixed costs and variable costs. Have we gathered any information from the client about its cost structure? Interviewer: Well, what do you think would be its largest costs? Interviewee: Given what I know about the pharma industry and the extensive R&D for rugs, I would guess Research and Development. Interviewer: Good, R&D costs are $5 billion. What would you guess are some other key categories of costs? Interviews larketing is usually a big cost Interviewer: Right. For this case, let’s assume marketing is $0 and there are no variable costs. [Where possible, the interviewee could have tried to anticipate this chain of questions and suggested, without being asked, the key categories of costs that might be relevant. Interviewee: Next I would want to size the Canadian market for this drug, assuming that we will only sell in Canada. To do this, the population of Canada is approximately 30 million people. We would now need to estimate the percentage that is asthmatics? Interviewer: There are 3 segments to this market: Basic — 2% of the population - have a periodic asthma attack, use 1 inhaler/month. Serious ~ 2% of the population — use | inhaler/week. Acute ~ 1% of the population — use 1 inhaler/week, but attack sometimes results in hospitalization and death. Also, the treatment is preventative. Itis a pill that must be taken every day. Management Consulting Association Case Book 2007 = 266