0

A

PROJECT REPORT

ON

IDENTIFYING AND BRIDGING THE GAP BETWEEN PATIENTS AND

MEDICAL DEVICE MANUFACTURERS GLOBALLY

FOR

PARTIAL FULFILMENT OF MBA IN HEALTHCARE MANAGEMENT

MASTER OF BUSINESS ADMINISTRATION (MBA- DE)

SIKKIM MANIPAL UNIVERSITY

SUBMITTED TO

SIKKIM MANIPAL UNIVERSITY

MANIPAL, KARNATAKA

UNDER THE GUIDANCE OF

Mr. Sanket Nandavadekar

SUBMITTED BY

Ms. Disha Gupta

Roll No.- 1311000445

HEALTHCARE MANAGEMENT

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CERTIFICATE

This is to certify that Disha Gupta has successfully completed the project

work as a part of academic fulfilment of Masters of Business Administration

(MBA) Semester IV examination.

_______________________

SANKET NANDAVADEKAR

Project Guide

Date : 14.10.2015

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DECLARATION

I, Disha Gupta student of Master of Business Administration, Semester- IV of

Sikkim Manipal University, hereby declare that I have successfully completed this

Project on- Identifying and bridging the gap between Patients and Medical Device

Manufacturers globally in the academic year 2015.

The information incorporated in this project is true and original to the best of my

knowledge.

DISHA GUPTA

Roll No. 1311000445

Date- 14.10.2015

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―Judge not the value of something by its price, but by how much value it adds to

your life‖

- Disha Gupta

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LIST OF CONTENTS

INDEX

# Description Pg No

1 Acknowledgement 4

2 Foreword by Guide 5

3 Preface 6

4 Executive summary 7

5 Review of Literature 9

6 Methodology used 41

7 Data Analysis 47

8 Conclusion 49

9 References 50

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ACKNOWLEDGEMENT

● I would like to thank Sikkim Manipal University for giving me the

opportunity to choose and explore my topic of interest for the purpose of

completion of my MBA.

● I would like to thank my guide Sanket for being a friend and partner in

completion of this project; and also for being strict with me so that I give my

best to this project.

● It is a pleasure to study pricing and price determining factors for Medical

Devices and related products in the Domestic and International Markets.

● The work carried out and data collected is applicable not only to Medical

Devices but also to Pharmaceutical and FMCG products in their respective

international markets.

● This project would be a compilation and guide for all professionals in

international marketing and sales profiles.

● Study of this project is a view of the prevailing gap between end users in

medical industry and the manufacturer & distributors in terms of pricing and

its impact on the industry.

● Project report is an effort to understand the impact due to this gap, and

mainly to define the measures to reduce this gap for the benefit of all the

stakeholders of medical industry.

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FORWARD BY GUIDE

Value offering of this study is well achieved from the given resources. I as a

mentor of the project feel amazed by the outcome of this study. Mainly about the

fact that 1.26+ Billion population of India has direct or indirect impact from the

area that project mentee has studied with sincerity and passion.

Project was carried with minimum resources at hand, given this case mentee has

done best of the possible effort to achieve most relevant conclusion on this study.

Project study has brought to light very important eye opening facts that healthcare

and medical industry. People of India and different participant in the healthcare

value chain have to realise that they can all together make this industry sustainable

only if they work in more productive way, in sync, safe guarding interests, bring in

some element of social responsibility, improve awareness levels and most prime is

to work in conjunction instead of just business goals.

Mere awareness, make in India, reactive involvement of government of India, fair

practices governing bodies, industry watch dogs and social bodies can bring the

change most expected in terms of pricing of medical devices, drugs, services and

overall offerings.

About the project mentee, I believe that she has showcased her brilliance not only

by selecting this most valuable area of study but more by achieving impactful

outcome on the fundamental aspects of healthcare and medical industry like price

to end consumers, services by doctors and hospitals, awareness levels among all

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the members of industry including government of India, stakeholders their interests

and the positive negative business benefits.

About the project research and study methodology, the plan was to make this study

set a direction on which areas the healthcare industry needs to focus on for making

it more sustainable as well as more affordable to all types of consumers in the

ecosystem. Therefore, many hours of primary research through online references,

books, magazines, white papers, speeches & lectures by industry experts, videos &

conferences, medical journals to name a few were thoroughly referred for forming

the very foundation of this project. And secondary study was primarily done

through survey method, using today‘s most up to date technology (Google docs,

polling, experts view, etc) were mindfully put to use and a healthy data deck was

built to reach study conclusion. I‘d encourage you as a reader to have a good read

on the conclusion drawn out of this study.

Conclusion achieved and next steps, though the conclusion may look like macro

level industry corrections, each of the recommendation made is a detailed study in

itself. A reform to be taken up and carried over years in a consortium form by the

private players, government bodies, doctors, medical professionals, hospitals,

manufacturers, distributors, dealers and engagement of end patients/ consumers. In

order to achieve balance of price and benefits also to make this whole industry a

sustainable environment for current and potential players everyone in the industry

need to join hands and work towards achieving set out milestones, these I believe

to be the very next steps from the industry owners and members towards a brighter,

fair and win-win future!

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PREFACE

● There is a huge physical distance between manufacturers of medical devices

and the actual end users (patients and doctors).

● The most impacting factors are the physical distance, time to treatment/

consumption and the price of the products.

● This work has been done in order to determine how the distance between

end- users and manufacturers can be reduced, and how we can get the

manufacturer closer to the end user of medical devices as well as equipment

which are life- saving and critical to a patient.

● This topic is of interest to me after experiencing various aspects of this

industry while I was working for past two years in the field of International

Marketing of Medical Devices.

● The actual cost of manufacturing a product (MP) is less than its selling price

(SP).Which has also been defined in mathematical representation as SP>MP.

● In this project the factors which determine the cost have been studied

carefully, to bring forth various measures to reduce those negative factors,

unnecessary costs and achieve better value for all the stakeholders from

manufacturers to patients.

● Everybody should be entitled and should have equal rights to avail of high

quality medical supplies. Cost should not be a factor while availing of health

care facilities.

● Today‘s Pharmaceutical industry has set an example to be looked up to by

many other industries, and it‘s only now that people are moving to generic

medicines only because of more awareness. They‘re able to decipher the

difference between brand names v/s generic names. Those generic medicines

are much less priced than the same products with a brand name or marketing

support.

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EXECUTIVE SUMMARY

Problem Statement-

● Manufacturers produce medical devices by using raw materials and their

engineering capabilities up to their maximum capacity.

● However, those life supporting products have to cross a series of

middlemen/ facilitators before reaching the final end user or patient.

● As the product passes through a chain of middlemen/ facilitators, its value

(base cost and then final sell price) also escalates step by step.

● The final value of the product is always on the higher side, and at times

more than 100% of its incurred manufacturing cost, shocking isn‘t it!

● Even if a manufacturer wants to he can‘t sell directly to the hospital as their

production capacity is higher than the consumption/ order levels of hospitals.

Significance of the study-

● This study is being done so as to find ways of bringing the end- user closer

to the patient in terms of access, awareness, affordability in terms of cost to

purchase and the overall value.

● Various pricing strategies like export, import regulations, registrations

required for medical devices have been studied and presented in this study.

● I‘ve also tried to include business aspect of why some products can‘t be

manufactured locally and only have to be imported from other foreign

markets.

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Purpose-

● This study was carried to make patients, doctors and healthcare professionals

aware of the difference between brand names and generic names.

● To improve awareness between manufacturers, distributors and retailers.

● To identify, analyse and scope possibilities of suggesting resolutions to the

on-going pricing issues globally.

Hypothesis-

● All medical device manufacturers and hospitals must have only one selling

point and one buying point respectively.

● This can be done by large sourcing organisations, which procure material

from many manufacturers globally and sell directly to hospitals.

● Also, manufacturing companies should have service handling, complaint

handling and training capabilities.

Methodology-

● Compilation of data from previously done research

● Discussions with industry experts

● Survey by means of questionnaire

Period of study- March 2015 to Sep 2015

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REVIEW OF LITERATURE

Why do we need distributors and how did the need arise?

DISTRIBUTOR- An entity that buys noncompeting products or product lines,

warehouses them, and resells them to retailers or direct to the end users or

customers. Most distributors provide strong manpower and cash support to the

supplier or manufacturer's promotional efforts. They usually also provide a range

of services (such as product information, estimates, technical support, after-sales

services, credit) to their customers.

Distributors, merchants, dealers or factors are characterised by two features.

First, unlike agents who take a commission, they buy stock for resale.

Second, they are usually but not always appointed by the manufacturer to cover a

specific geographical area or sector of the market.

The ideal environment for a distributor is a market with many small customers and

where the level of sales service required is high. The spread of customers is

difficult and expensive to reach with a directly employed sales force that is more

suited to dealing with a limited number of large buyers. Distributors generally aim

to win business on sales rather than technical service. Their stock of products

means customers can have instant delivery.

A difficult technical problem may require referring to the manufacturer. Simple

repair work may be handled by the distributor.

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It usually falls upon the manufacturer to provide marketing support. This can range

from the provision of display material for the showroom through to media

advertising or mail shots aimed at drawing a response and directing it to the

distributor.

If a manufacturer decides to use distributors rather than another marketing channel,

he should not begrudge the distributor's margin. This margin saves the

manufacturer from having to invest in cars, salesmen, depots and expensively high

stock levels. The margin he provides should be sufficient to cover the distributor's

costs and provide a profit incentive.

REASONS TO USE DISTRIBUTORS

Administrative Savings

The core business practice of a manufacturer is to make and package products. A

distributor becomes the sales arm of your company for which you do not have to

pay. By using distribution, you are able to reach a mass audience of retail outlets

without having to invest any of your own company money into developing and

maintaining that business network.

Customer Exposure

One of the key functions of a distributor is to grow and administer a network of

viable retail outlets. Many distributors also offer specialized retailers that can reach

a specific target audience. When you use a distributor, you are able to get your

product out to a mass market to expand your customer exposure, or you can reach

a specialty target audience without having to do any of the necessary market

research.

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Market Research

Distributors deal with retail clients on a regular basis, and those retail clients sell to

your end users. If you want to do market research on a current product or get input

on new ideas on which you are working, a distributor can collect that information

for you directly from your end users. This allows you to utilize a distributor's large

network of retail clients to keep updated on customer preferences.

Expansion

Distributors present a ready-made audience of retail clients in any market for a

manufacturer that is looking to expand its product reach. For example, if your

company has decided to try and compete in a European market, you can find an

international distributor that will find a network of European retail outlets and give

you the information you will need on what kind of product features a European

audience would prefer.

BENEFITS OF STRONG IN- MARKET REPRESENTATION:

Strong in-market representation is often critical to export success. In addition to

dealing

directly with your clients and helping you to grow your export sales, a good

representative is

your partner and can provide you with a number of benefits. The benefits of strong

in-market representation include:

● dealing directly with your clients in helping grow your export sales

● access to local knowledge

● on-going market intelligence about competitors and trends

● a watch-dog who can identify people infringing on your trade mark/patents

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● someone to assist with local rules and regulations e.g. special labelling

requirements

● in-market customer support for queries, support and warranty

● usually have an established network of retailers and/or wholesalers, saving

you market development costs and time

PRICING

Marketing theory states clearly that price is one of the 5 P‘s (Product, Positioning,

Place, Promotion and Price) that contributes to the marketing mix in order to get

potential customers‘ attention, motivate them, and get them to buy products or

services.

Pricing, as part of the marketing mix, is essential and has been always one of the

most difficult decisions in marketing because of heightened competition (Myers

1997), gray market activities (Assmus and Wiese, 1995), counter-trade

requirements (Cavusgil and Sikora ,1988), regional trading blocks (Weekly, 1992),

emergency of intra-market segments (Dana 1998), and volatile exchange rates

(Knetter, 1994).

Consumers have different perception of the products depending on the price.

Therefore, pricing products for consumers is a difficult task, mainly because a high

price may cause negative feelings about products, and also a low price can be

misleading on other products features such as quality.

There are many pricing objectives that lead to different strategies and businesses

have to develop and apply the best strategy in various situations. Some of the ways

of pricing a product are: premium and penetration pricing,

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● price skimming,

● economy and psychological pricing,

● product and optional product pricing,

● captive and product bundle pricing,

● promotional,

● geographical and

● value pricing

REASONS FOR SELLING ABROAD OR EXPORTING

Firms go and sell international for ―pull‖ factors, based on the attractiveness of a

potential foreign market, as well as for ―push‖ factors, which make firm‘s domestic

market appear less attractive. The following are some of the factors that push firms

to sell abroad:

● Sometimes companies develop product for international and export markets

only;

● Domestic market may be too small and exporting maybe a viable option to

exploit economies of scale;

● The nature of the business or product requires firms to operate

internationally or in foreign markets (airlines);

● companies seek foreign expansion in order to minimize and spread the risk,

and reduce its dependence on one geographical market;

● Because of saturation of domestic market, companies seek foreign markets

and usually product life cycle reaches its maturity stages in the domestic

market, while being at earlier stages of the life cycle in less developed

markets (sub-Saharan Africa).

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It is important to emphasize that all companies face international competition, not

only in export markets, but in domestic markets as well. Becoming internationally

competitive is therefore not only an essential requirement for successful exporters,

but also the best means of defence that local companies can use to counter foreign

imports. Successful exporting contributes positively to a country's economy not

only on the macro level, but on the micro level as well. Exporting offers companies

many additional opportunities that they cannot obtain from domestic markets.

These include the following:

● increased sales and opportunities;

● added sales volume may lower the production cost;

● lower production cost may improve overall profitability;

● competing in foreign markets should contribute to increasing the company's

overall competitiveness;

● improving the status of the company by competing in foreign markets;

● reducing risks by selling to diverse markets;

● taking advantage of economies of scale by enlarging the sales base in order

to spread fixed costs;

● compensating for seasonal fluctuations in domestic sales;

● finding new markets for products with declining domestic sales potential,

thereby extending the product's life cycle;

● exploiting opportunities in untapped markets;

● taking advantage of high-volume purchases in large markets overseas such

as the US, Europe and Asia; learning about advanced technical methods

used abroad; following domestic competitors who are already selling

overseas

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EXPORTING VS DOMESTIC SELLING

There are numerous factors that impact on the external environment in which

exporting takes place. Compared with the domestic environment, which is fairly

uniform in nature, the external environment is far more complex and exporter faces

numerous additional problems when selling across international borders. These can

be summarized as follows:

1. new parameters that include import duties and restrictions,

2. different modes of transport,

3. international, trade documentation,

4. foreign currencies,

5. different and additional marketing channels;

6. New environments such as foreign markets that represent unfamiliar

environments. These include the cultural, legal, political, social and

economic environments that the exporter has to contend with.

Operating in foreign markets exposes the exporter to far wider and more intense

competition than would be the case in the domestic market.

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UNDERSTANDING FOREIGN MARKETS

Firms have to think beyond their domestic markets in order to survive and prosper.

They have to think globally and act locally. The task of international marketing

management is the same as the task in domestic markets. In all markets, customers

are the driving force of marketing and companies need to produce products

efficiently. Products have to be distributed through the most appropriate channels

and priced according to local market environment conditions. Local market

conditions may be different and companies have to adapt to the needs of local

customers. The PEST (Political, Economic, Social, Technological) factors have

been used to analyze foreign market opportunities, and what makes them different.

Policy Environment

For marketers considering an entry strategy into a foreign country or region, a

number of environmental factors should be used to assess market opportunities and

constraints. Cultural and structural issues are commonly evaluated as a first step in

the market expansion process. Environmental monitoring should continue

throughout the business cycle. In light of multilateral trade agreements and other

economic and policy integrations, marketers must also become adept at evaluating

country standards, multilateral standards, and their interaction effects. Since

marketers must comply with the law, an understanding of governmental policy and

the process by which it is created is central to effective marketing decision-making.

To operate, international firms must understand the policy-making process and

different categories of laws, and marketers must also investigate the general policy

climate and local laws that affect the operation of their business. In developing

marketing and business objectives, decision-makers can unintentionally create

incentives and pressures that run counter to legal and ethical standards. Although

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not always conceptualized in this way, the objective-setting component of

marketing strategy is pivotal to customer satisfaction, financial performance, and

compliance. As Ferrell et al. (1998, p. 361) suggest, "...an overwhelming number

of crimes in business (i.e. price fixing, product misrepresentation, copyright

violation, etc.) stem from employee misconduct designed to benefit the company.

Employees often believe that corporate objectives have greater importance than

legal and ethical requirements..." Common marketing objectives, especially

quantitative targets, should be developed with an understanding of rules for

competitive behavior. Regardless of product, industry, or geographical focus,

marketers are concerned with standards on advertising, product safety and liability,

product labeling, selling, electronic commerce, data privacy, and general

competitive behavior. This suggests that marketers have to ensure that legal and

regulatory concerns are monitored and integrated into marketing decision-making.

Political Factors Researches have stated that pricing is influenced by laws and

regulations which necessitate product modifications, in compliance with health and

safety standards, environmental regulations, measures systems, that may prevail in

foreign markets (Theodosiou 2000). Government policies influence the legislative

and economic frameworks. Perhaps the most ominous cloud from the political

arena is the threat of wars. World War III has been avoided thus far, but "smaller"

wars and threats of war can have serious regional and even wider implications,

especially with the nature of weapons that may be used - from nuclear to biological

to chemical (Iraq). Economic Factors The level of GDP is the main measure of

economic attractiveness of foreign markets. As GDP increases, the demand for

goods and services increases too. Furthermore marketers consider the distribution

of income within a country, in order to identify niche and segment markets.

Marketers always watch not only the present economic prosperity of a country, but

also its future development in terms of population and density, inflation and

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economic growth, age and distribution of income, level of urbanization as well as

other economic activities that will affect markets and pricing.

Economical environment:

The economic environment of the foreign or host country influences pricing

decisions. It has a significant impact on firm‘s costs, determines demand potential

for a particular product/service, in addition to the prices that local customers can

afford and are willing to pay (Whitelock and Pimblett 1997). For example, some

products that are considered essential in western countries, are viewed as luxury

items in my country (Rwanda), and most of the sub Saharan African countries.

This confirms the hypothesis that the demand for a product/service at different

price levels is a function of the purchasing power of targeted customers,

determined by the level of economic development of the country (Jain 1989).

Social Factors:

Social Factors People from different cultures have different tastes, buy different

products and respond in different ways to the same service or product. Therefore,

the demographic structure of a foreign market should be considered. The aging of

population in major western markets, and the increase in population in several

countries such as India and China, is another continuing development that will

affect international marketing. As teens around the world are becoming a global

market segment today, and sub-Saharan Africa is becoming part of global market,

the marketing strategies mix, including international and export pricing will have

to adapt to social factors. That is when pricing for international markets, one has to

take into consideration of local material culture, language, aesthetics, education

and religion, as well as attitudes and values. Firms need to examine carefully target

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market country‘s characteristics and purchasing behaviors, to select appropriate

pricing strategy. Price level is an important criteria used by consumers in

evaluating competing products. Other criteria such as product quality and

performance are important to customers (Douglass and Wind 1987). Thus, in

developing pricing strategy, firms must be aware of foreign consumers‘

preferences, perceptions, and purchasing behaviors with respect to various price

levels (Theodosiou, 2000).

Technological Factors:

Technological Factors Firms need to analyze the technological environment of

foreign markets. Well-developed communication infrastructure is an important

factor to respond rapidly to customer‘s needs. International firms often rely on

existing local distribution infrastructure in order to transport and distribute their

products to consumers. This may have significant effect on costs, and in turn may

influence price, as well as profits. Technology change is another dynamic but

ongoing phenomenon. A perfect example is the internet. Internet allows online

contact with the firm's customers, suppliers, and partners and subsidiaries around

the world, but it may also increases the opportunities for existing competitors and

openings for new competitors. Therefore, technology provides both opportunities

and challenges. Pricing is a strategic choice, and it will be partially influenced by

environmental factors. Taking into account elements of cost, the behavioral

assumptions of self-interest lead firms to take advantage when environmental

forces fluctuate (Williamson, 1975). However, some environmental factors, such

as: economic and regulatory volatility, and competitive intensity, have been

identified as moderating effects between strategy and performance (Cavusgil and

Zou, 1994; Myers 1997).

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PRICING STRATEGIES

PRICE: Price is the amount of money charged for a product or service.

Price = product + service + profit + image.

Price will include the cost of producing your product, the cost of providing any

needed services that may accompany the product, the amount of profit that you

need to make in order to stay in business. Often the firm is trying to portray the

best quality or the lowest price. Therefore, price can be a direct reflection of

quality or even perceived quality. There are several basic pricing strategies

considered when making decisions for export:

Economy and Premium

Premium pricing is adopted when there is a substantial competitive advantage, and

the product or service is unique (Concord flights), and economy pricing strategy

when the cost of marketing and manufacture is kept at a minimum.

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Penetration or Low Price

This first model uses a low profit margin to penetrate the market. It is designed to

grab market share quickly. Penetrating the market with an exceptionally low-priced

item creates a broad customer base. It also provides high value-for-the-dollar to the

customer. Penetration is used when prices are set first low in order to attract new

customers and to gain market share, and then the price is increased after the market

share has been achieved. To penetrate the market and gain market share,

businesses set a low price in comparison to other competitors. Note that also low

price is sometimes perceived as indication of low quality product. It may also be

difficult to increase price in the future without incurring loss.

Skimming

This is appropriate for some product to be priced as high as the market will bear.

However, few buyers are attracted, and lower sales volumes can be achieved when

price is such high. This strategy is often used when a new product is introduced

into the market, and is in great demand. For this strategy, the product or service is

charged high because of a substantial competitive advantage. This high price tend

to attract new customers into the market, and then falls due to lower unit cost as

economies of scale are achieved. Skimming is the opposite of penetration and is a

high priced model, sometimes called "top pricing." The idea behind this pricing

strategy is to return high profits, even at the cost of losing a large number of

customers. Typically, when a company launches a new product, they charge higher

prices in the beginning to help recoup R&D expenditures as fast as possible. To be

successful, firms must have a unique product that's in demand. For example, ―chip

manufacturers‖ often use this methodology during the introductory phase of a new

proprietary product. Another model that closely resembles "skimming the cream,"

is the high cost option called ―prestige pricing.‖ Companies like Mercedes-Benz or

BMW are good examples of this model. Customers purchase products from them

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knowing they probably paid too much. But, these companies have the prestigious

reputation of high quality products and customer service.

Competitor’s Pricing

To attract the largest number of customers and generate consistent turnover, it may

be necessary to set price not too high, not too low, just in the middle in line with

other competitors. Prices are tagged to the competition and profits are acceptable.

―In the long run, no single pricing strategy will always work best, and producers

should be prepared to adjust to any opportunities or dangers which arise in the

ever-changing market.‖ For export pricing, exporters should consider other factors

such as freight and transport, duties, and risks.

Even though premium pricing, penetration pricing, economy pricing, and price

skimming are the main pricing strategies for marketing mix, there are other

strategies to pricing such as: psychological pricing, product line and optional

product pricing, captive and product bundle pricing, promotional, geographical,

value pricing, rigid and flexible cost-plus strategy, dynamic increment, marginal

cost, and loss leader pricing strategies.

Rigid Cost-Plus Strategy

In order to make profits, managers adopt rigid cost-plus pricing strategy. This is

accomplished by adding international customer costs and a gross margin to

domestic manufacturing costs. Hence, the cost to the customer includes

administrative and R&D costs, transportation, packaging, insurance, and other

marketing expenses. Cost-plus pricing strategy appears to be the most dominant

strategy among Americans firms (Cavusgil 1988).

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Flexible Cost-plus Strategy

Flexible strategy allows price variations depending on circumstances. For example

there may be some discounts depending on the customer, the order, or competitive

factors. This strategy is often used to encounter competitive pressures or exchange

rate fluctuations.

Dynamic Incremental Strategy

The strategy assumes that fixed and variable domestic costs are incurred regardless

of export sales. In this strategy, some domestic costs such as: R&D, domestic

promotion and marketing costs, are disregarded. The dynamic incremental strategy

also assumes that there will be always unused capacity or excess supply, and

therefore exported products cannot be sold at full cost. This helps companies to

enter, penetrate and compete in international markets.

Market Holding

The market holding strategy is frequently adoptee by companies that want to

maintain their share of the market. In single- country marketing, this strategy often

involves reacting to price adjustments by competitors. One of the changes factors

in the price in global marketing is the currency fluctuations which often trigger

price adjustments. Adjusting prices to fit the competitive situation may mean lower

profit margins. A strong home currency and rising costs in the home country may

also force a company to shift its sourcing to in-country or third- country

manufacturing or licensing agreements, rather than exporting from home country,

to maintain market share. Market holding means that a company must carefully

examine all its costs to ensure that it will be able to remain competitive in target

markets.

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Cost plus

Another strategy, frequently used by companies new to exporting is cost-plus to

gain hold in global marketplace. There are two cost-plus pricing methods:

historical accounting cost method which defines cost as the sum of all direct and

indirect manufacturing and overhead costs, and estimated future cost method

which is used mostly in recent years. Cost –plus pricing requires adding up all

costs required to get the product to destination, plus shipping and ancillary charges,

and a profit percentage. It is relatively easy to arrive at a quote, assuming that

accounting costs are available. This approach, however, ignores demand and

competitive conditions in target market. Therefore this approach is either too high

or too low in the light of market and competitive conditions. Novice exporters do

not care because they react to the market opportunities rather than having proactive

seeking for them.

Price Escalation

Price escalation is the increase in a product‘s price as transportation, duty, and

distributor margins are added to the factory price. Beginning exporters might use

this approach to determine the CIF price plus any inland charges as duty, inland

transportation, distributor margins etc.

The knowledge of customer about the technology of new product and the amount

of his or her awareness can play a major role in pricing. As much as the knowledge

of a customer about the product is low, the producer can use this margin to skim

the market or get a better premium from this market. [Khalil, 2006]

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Transfer pricing

Transfer pricing refers the pricing of goods and services bought and sold by

operating units or divisions of a single company. In other word, transfer pricing

concerns intra corporate exchanges- transactions between buyers and sellers that

have the same corporate parent.

There are three alternative approaches to transfer pricing: (1) cost based pricing,

(2) market based transfer pricing, and (3) negotiated prices.

Some companies using cost- based approach may arrive at transfer prices that

reflect variable and fixed manufacturing costs only. Alternatively, transfer prices

may be based on full costs, including overhead costs from marketing, R&D, and

other functional areas. The way costs are defined may have an impact on tariffs

and duties sales to affiliates and subsidiaries by global companies. Cost plus

pricing is also based by costs but different approach. In this approach, profit must

be shown for any product or service at every stage of movement through the

corporate system. It may be set at certain percentage of fixed costs such as 15

percent of cost. It is unrelated to competitive and demand conditions but many

exporters use it. Another approach to transfer pricing is market- based approach. A

market –based transfer price is derived from the price required to be competitive in

the international market. The volume level also plays a major role in pricing. To

use market- based transfer prices to inter in a small market, third country sourcing

may be required. This enables a company to establish its name or franchise in the

market without committing to a major capital investment. A third alternative is to

allow the organization affiliates to negotiate transfer prices among themselves. In

some instances, the final transfer price may reflect costs and market prices, but this

is not a requirement. (Horngren, Foster, 1991) In a research conducted by

Horngren and foster (1991), was found that 46 percent of U.S. based companies,

28

33percent of Canadian, 41 percent of Japanese and 38 percent of U.K.-based

companies use some form of cost based transfer pricing. Corporate costs and

profits are also affected by import duties. The higher the duty rate, the more

desirable is a low transfer price. The high duty creates an increase to reduce

transfer prices to minimize the customs duty. The companies also may use three

policies on world- wide pricing: extension ethnocentric, adaptation/poly centric

and invention/ geocentric.

In the first policy, the price of an item is the same around the world and the

importer absorb freight an import duties. Empirically in this policy, no information

on competitive or market condition is required and does not respond to the every

market neither it maximize the company profits in each national market nor

globally. Its only advantage is to simply entering a market if it suit to their price

which the exporter has no information about it.

In the second policy the exporter tries to match the price with any individual local

market. This policy, in practice, permits subsidiary or affiliate manager to establish

any price they feel is most desirable in their circumstances. This policy may cause

product arbitrage, because of different prices in different location and enterprising

business managers may use it and foster a grey market for the company‘s product.

It may also weaken the corporate strategies of the central company because all

local market managers have the freedom to set the price for their markets.

Different prices for different places may have another disadvantage, because it

may send a signal to the rest of the world that is contrary to company interests. A

price move anywhere in the world is known instantly all over the world specially

by using the world wide webs in the internet by companies which makes the

customers aware of the competitive price information. The third and the best policy

to international pricing is termed invention/ geocentric. Using this approach a

29

company neither fixes a single price nor remains apart from subsidiary price

decisions, but instead strikes intermediate positions. There are unique market

factors, like local costs, income levels, competition, and local marketing strategies

that should be recognized in arriving at pricing decisions. The reason we perceive

it as the best policy is that local costs plus a return on invested capital and

personnel fix the price floor for the long term. This approach lends itself to global

competitive strategy. A global competitor will take in to account global markets

and global competitors in establishing prices. Prices will support global strategy

objectives rather than the objectives of maximizing performance in a single

country. This policy forces the exporter to consider the said aspects of any market

globally and focusing the company‘s strategy as well. In the study of Samli and

Jacobs (1994), for the pricing practices of U.S. multinational firms, they concluded

that 70 percent of the firms standardized their prices, where as 30 percent used

variable pricing in world market. They said, it would appear that the companies

should consider renewing the pricing policies.

30

EXPORT PRICING

Marginal Costing

In highly competitive markets, some companies may want to consider turning to

marginal costing to ensure that their products are competitively priced. Marginal

costing ignores the fixed cost incurred by companies, on the assumption that these

costs will be incurred by domestic sales anyway, whether or not the company

exports and therefore, only variable costs need to be considered in export pricing.

Ignoring fixed costs will naturally reduce total costs, enabling lower prices to be

set. Where possible, however, companies should not resort to this method of

pricing.

The Right Optimum Price

The optimum pricing strategy for a product or service meets the needs of both the

buyer and the seller. Because when you find the right price, profits will skyrocket

and your business will prosper. The buyer determines if a price is right by looking

at the benefits to them and how a company's profit structure compares to the

competition. The seller sets their price to maximize profits, while considering the

bigger picture of a business model (i.e., high price/low volume or low price/high

volume). The company must pay for the cost of production, marketing and

overhead, and still produce a profit.

The Loss Leader:

The loss leader is the business pricing model to get the job done. No matter the

cost, even at a loss in profits, this strategy has one objective to eliminate the

competition. The consequences of even a slight misjudgement in using this retail

pricing strategy could be devastating to your business. History gives us a great

31

example. The "Gasoline Price Wars" of the late 50s and early 60s started as a result

of companies using this strategy. It marked the beginning of the end to many small,

individually owned gasoline stations in the U.S. Today, we see a more modern

version of this pricing strategy being used by supermarkets and clothing store

chains. The objective in these cases is to lure the customer into the store with a

loss-leader. The hope is that when customers show up to buy the "sale" item, the

company will make up the loss in profits through additional customer purchases.

When used in this form, the "loss leader" is actually a variation of "pricing to

penetrate."

PSYCHOLOGY OF PRICING:

Value Bundling and Discounting Psychology plays an important role in the

marketing world. It helps build the perception of price and value. The psychology

of retail pricing is probably more important than the price itself. For example, the

psychology of not using values ending in "0" or "1" in the price gives the customer

the perception of saving. For example...$19.99 is viewed as a greater value over a

product priced at an even $20. Logically, the customer knows the difference is not

great. But there is still that sense of saving. Value Bundling gives the customer the

feeling of getting "something for nothing.‖ For example, buy one, and get second

free. Discounting also builds loyalty and encourages bulk purchases. Percentage

off the normal retail price attracts customers and the greater the discount, the

happier the customer would be.

32

SIGNIFICANCE OF PRICE-

1. Among the four marketing mix, product, distributing channels, promotion

and price, only price creates income and the other three generate costs.

2. Price, besides creating income, plays a major role as a strategic factor in

developing competitive advantage in the market.

3. The amount of income and promotion of a company regarding the

positioning and finding a suitable position in the mind of customers are

related to suitable pricing.

33

SIGNIFICANCE OF PRICE IN GLOBAL MARKET-

1. Global pricing can also be based on other external criteria such as the

escalations in costs when good are shipped long distance across national

boundaries.

2. Pricing in global markets must be evaluated at regular intervals and adjusted

if necessary

3. Similarly pricing objectives may vary, depending on product‘s life cycle

stage and the country-specific competitive situation

4. Any pricing system should address price floor, price ceiling and optimum

prices in each of national market in which the company operates.

5. The pricing consideration for marketing outside the home countries are the

reflection of quality in price, competitiveness, the kind of pricing objective

i.e. penetration, skimming holding, the type of discount, market

segmentation, the pricing option in case of costs increase or decrease, the

logicalness of price by the host- country, and its laws and the probable

dumping.

ENVIRONMENTAL FACTORS AFFECTING PRICING-

Marketers must deal with a number of environmental factors when making pricing

decisions. Currency fluctuation, inflation, government controls and subsidies,

competitive behavior, and market demand are among these factors. Some of these

factors work in conjunction with others; for example, inflation may be

accompanied by government controls.

34

When currency fluctuation occurs, there are two options for pricing: one is to fix

the price of products in country target market. In this case, any appreciation or

depreciation of the value of the currency in the country of production will lead to

gain or losses for the seller. The other option is to fix the price of products in home

country currency. If it is done, any appreciation or depreciation of the home

country currency will result in price increases or decreases for customers and no

immediate consequences for the seller. In actual practice, a manufacturer and its

distributor may work together to maintain Market share in international market.

Either party, or both, may choose to take a lower profit percentage. In the long

term contracts, both parties agree an exchange rate clause, which allows them to

agree to supply and purchase at fixed prices in each company‘s national currency.

Inflation, or a persistent upward change in price levels, is a worldwide

phenomenon. Inflation requires periodic adjustments. These adjustments are

caused by rising costs that must be covered by increased selling prices. An

essential requirement when pricing in an inflationary environment is the

maintenance of operating profit margins. LIFO costing method is prescribed by

some practitioners under conditions of rising prices

Government control can also limit the freedom to adjust prices, and the

maintenance of margins should be compromised. In a country that is undergoing

severe financial difficulties and is in the midst of a financial crisis (e.g., a foreign

exchange shortage caused in part runaway inflation), government officials are

under pressure to take some type of action. Governmental actions in the case of

hard financial problems include use of broad or selective price controls, prior cash

35

deposit requirements for imports, customs duties for imports, value added tariffs,

proliferation of rules and regulations, and subsidization.

Pricing decisions are also bounded by competitive action. If competitors are

manufacturing or sourcing in a lower costs country, it may be necessary to cut

prices to stay competitive.

PARTICULAR FACTORS OF AN EXPORT PRICE

The factors for developing price are costs, the market and customer behavior

conditions, competition and the company policies. The main factor for pricing is

costs. The price base on costs, especially when there is no information about the

market and customer willingness, is a virtually easy approach and shows the

fairness for value added payment of production. The costs are useful for

determining the floor price of a product. In short term, when we have extra

capacity, the floor costs may be the out of pocket costs, i.e. direct costs like labor,

material and transport costs. However, in the long term, the full costs must be

considered for the products, but may not be considered for all products. Direct

costs, when using in export, means the required costs for developing income. In

addition to extra capacity, direct cost pricing (margin cost pricing) for entering a

market in the competitive condition or preserving a market in the competitive

condition can be applied. In a survey of 20 export managers, they believed there

are other reasons for the export pricing less than full costs. These reasons are: to

help intermediate organizations or agents, maintaining the coworkers working

together, selling a product especially out of the normal line of export and for

offering a manufactured sample to a dependent or under license organization, mass

customized production, in many companies, when the conditions of market are not

36

normal, the pricing less than full costs is applied. The floor price is mostly affected

by floor price. This kind of pricing is highly recommended when the company is

sure that the internal market will guarantees the sale volume at least up to

breakeven point. From that point the profit margin will be a combination of

internal and global sales.

The market condition pricing is based on the market demand and the product

attractiveness in each market. The nature of market can determine the ceiling of the

price. When the demand, in a market for the product, is high we use higher prices

for that market. Utility, or the assumed value of buyers of a product, determine the

ceiling price of a product. In demand forecasting of a market, exporter can classify

the market based on the price attractiveness for customer in different price levels.

Then the export manager can define a classified utilities related to prices. The main

problem of this kind of pricing is the lack of information for demand forecasting

and the customer willingness particularly in developing countries. Therefore the

market condition is a difficult factor for pricing, but at least any company has

enough information about the internal market condition of its homeland, which we

will use it in construction of our export model later. The third and may be the most

important factor of pricing is the condition of competition. Condition of

competition helps for pricing between the boundaries of mentioned first and

second factors. The competitor reaction forces producer to determine new export

pricing. The price of competitors affects the sale volume of exporter and the

resulted decision may be less or more than price of them. When an exporter does

not have enough authority for pricing a competitive market, the main problem of

pricing then will be to sell the product with the assigned price or not. If the floor

price of a manufacturer is less than the current price of market, the product will be

produced and sold. The market condition pricing is most suitable when the new

37

technology used for the product or service is complex or unique for that market

and the knowledge of customer or market about know- how of the product is little.

Pricing can different in each market, depending on different stages of a product.

When we want to enter a competitive market we may use direct costs because of

the product and cherry picking character of the intermediates and possible future

agents. When the product is well known, and well positioned, we may use

competitive or other market pricing suitable for that market. When the market is

saturated by different competitors we may use niche pricing and stay in that market

and let other competitors leave this market or we leave the market, during the last

stage of product life cycle, if we feel this market will not be profitable any more.

This article is based on the theories stated in the above sections and an extraction

of a PhD research thesis titled: ―Application of Global Marketing Theories in

Export Growth of Tire Industries in Iran by the author.

38

PITFALLS OF EXPORTING

It is important for prospective exporters must know that there are some potential

pitfalls in exporting. They include the following: management might need to

devote a considerable amount of time to the start-up procedures and decisions, key

personnel might have to be diverted from domestic responsibilities to help with the

company's export activities; additional plant facilities might be needed; catalogues,

brochures and other sales promotion material might need to be translated into a

foreign language; the product might need to be modified to meet foreign market

specifications; credit terms might need to be extended because of competition,

local custom and transit time. Exporting is generally an expensive activity and will

require additional financial resources.

Setting prices for international markets is not an easy task. Decisions with regards

to product, price, and distribution for international markets are unique to each

country (Jain, 1989) and differ from those in the domestic market (Diller and

Bukhari, 1994)

Furthermore, other factors such as:

● the rate of return,

● market stabilization,

● demand and competition-led pricing,

● market penetration,

● early cash recovery,

● prevention of competitive entry,

● company and product factors,

● market and environmental factors,

● as well as economic, political, social and cultural factors,

have to be considered in the decision making process.

39

WHY DO NATIONS IMPORT?

An import is a good brought into a jurisdiction, especially across a national border,

from an external source. The party bringing in the good is called an importer.

An import in the receiving country is an export from the sending country.

Importation and exportation are the defining financial transactions of international

trade.

In international trade, the importation and exportation of goods are limited

by import quotas and mandates from the customs authority. The importing and

exporting jurisdictions may impose a tariff (tax) on the goods. In addition, the

importation and exportation of goods are subject to trade agreements between the

importing and exporting jurisdictions.

The motivation for a country to import goods and services from other countries is

perhaps less obvious than its motivation for selling exports (making a profit on

goods not consumed by the domestic market). As with exports, the purposes served

by imports vary from country to country. Let‘s explore these various purposes by

starting with asking why a country like the United States, with its massive and

extraordinarily diverse economy, would need to import anything from other

countries.

Yet no country today, including the United States, can be totally self-sufficient

without suffering a high cost. All countries need to—or choose to—import at least

some goods and services for the following reasons:

Goods or services that are either a. essential to economic well-being or b. highly

attractive to consumers but are not available in the domestic market

40

Goods or services that satisfy domestic needs or wants can be produced more

inexpensively or efficiently by other countries, and therefore sold at lower prices.

It is helpful to illustrate these points by looking at the case of the United States,

precisely because it comes closer to being self-sufficient than any other country for

the reasons mentioned above (several climactic zones, resources, able workforce).

Coal, copper, iron, silver, and nickel are just a few of the natural resources the

United States possesses in large quantities that other countries do not possess.

41

WHAT IS GLOBAL SOURCING?

Global sourcing is the practice of sourcing from the global market for goods and

services across geopolitical boundaries. Global sourcing often aims to exploit

global efficiencies in the delivery of a product or service. These efficiencies

include low cost skilled labor, low cost raw material and other economic factors

like tax breaks and low trade tariffs.

Common examples of globally sourced products or services include: labor-

intensive manufactured products produced using low-cost Chinese labor, call

centers staffed with low-cost English speaking workers in

the Philippines and India, and IT work performed by low-cost programmers in

India and Eastern Europe. While these examples are examples of Low-cost country

sourcing, global sourcing is not limited to low-cost countries.

Majority of companies today strive to harness the potential of global sourcing in

reducing cost. Hence it is commonly found that global sourcing initiatives and

programs form an integral part of the strategic sourcing plan

and procurement strategy of many multinational companies.

Global sourcing is often associated with a centralized procurement strategy for a

multinational, wherein a central buying organization seeks economies of

scale through corporate-wide standardization and benchmarking. A definition

focused on this aspect of global sourcing is: "proactively integrating and

coordinating common items and materials, processes, designs, technologies, and

suppliers across worldwide purchasing, engineering, and operating locations.

The global sourcing of goods and services has advantages and disadvantages that

can go beyond low cost. Some advantages of global sourcing, beyond low cost,

include: learning how to do business in a potential market, tapping into skills or

resources unavailable domestically, developing alternate supplier/vendor sources

42

to stimulate competition, and increasing total supply capacity. Some key

disadvantages of global sourcing can include: hidden costs associated with

different cultures and time zones, exposure to financial and political risks in

countries with (often) emerging economies, increased risk of the loss of intellectual

property, and increased monitoring costs relative to domestic supply. For

manufactured goods, some key disadvantages include long lead times, the risk of

port shutdowns interrupting supply, and the difficulty of monitoring product

quality. (With regard to quality in the food industry, see Roth et al. (2008).

International procurement organizations (or IPOs) may be an element of the global

sourcing strategy for a firm. These procurement organizations take primary

responsibility for identifying and developing key suppliers across sourcing

categories and help satisfy periodic sourcing requirements of the parent

organization. Such setups help provide focus in country-based sourcing efforts.

Particularly in the case of large and complex countries, such as China, where a

range of sub-markets exist and suppliers span the entire value chain of a

product/commodity, such IPOs provide essential on-the-ground information.

Over time, these IPOs may grow up to be complete procurement organizations in

their own right, with fully engaged category experts and quality assurance teams. It

is therefore important for firms to clearly define an integration and scale-up plan

for the IPO.

43

METHODOLOGY USED:

QUESTIONNAIRE FOR SURVEY

Introduction to ―Google Forms‖-

Google recently released a revolutionary gem into its increasingly robust

Google Docs platform.

Google Forms is a flexible form and survey development interface with

built-in reporting.

While still in its infancy, Google Forms is the start of an incredibly versatile

data collection framework.

It is a free service from Google, quick and reliant. Moreover the responses

can be accessed over an android phone by means of the Google drive

application.

Survey data is far from being difficult, nor costly, to store.

Steps to create the Google form:

1. Navigate the browser to docs.google.com and log-in

2. Go to the menu labelled ―New‖ at the left and select ―Form‖. A new Google

Form has been created. Click to edit the title and description, then click

―Add question‖

3. Edit the question text and list the possible responses.

4. Click ―Save,‖ then click the link at the bottom of the page to view the

published form.

5. After people have filled out the form, you can view analytics for the form

data by clicking ―Show Analysis‖ in the edit form view.

6. All of the form responses are stored in a Google Spreadsheet, which can be

easily exported to .XLS/.CSV for making custom graphics in MS- Excel.

44

URL of the form:

https://docs.google.com/forms/d/1LU1mt9wmPXwB0XuDknaeV9j4rMOglmIUW

4nPMFQdg2Y/viewform

ACTUAL FORM

Identifying and Bridging the gap between Patients and Medical Device

Manufacturers Globally

* Required

Disclaimer: This survey isn‘t a data generation activity, and none of the

details/ information will be retained for any other research work or

commercial activity; nor will it be published in any publicly available

literature. It is only being obtained to form a sample size of less than 500

senior and established medical professionals‘ opinions.

Dear Participant, 1) We really appreciate your time and support in this

research towards science and medicine. 2) This survey is a part of research

project on ‗Identifying and bridging the gap between Patients and Medical

Device Manufacturers Globally‘. 3) The major objective of this project is to

study the prevailing gap between end users like patients & doctors and

medical device & drug manufacturers. 4) Your inputs will add value to the

project study, and should lead to effective resolution in reducing the gap

between medical treatment and patients. This survey shouldn‘t take more

than 10 minutes, and we request you please be as descriptive in presenting

your opinion.

45

Personal Information

All contact details would be kept confidential.

Name *

Age and Gender

(eg: 32, F)

email ID *

46

Profession *

Highest Educational Qualification *

Location *

1) As a medical professional do you believe that quality medical

treatment isn’t affordable even today?

o Yes

o No

2) Do you think there's scope to reduce prices/charges/buying cost of

medical treatments, device or drugs for the end users’ consumption?

(Please answer with "Yes" or "No" and elaborate your opinion)

3) Primary research has identified scope to reduce prevailing pricing

gap. According to you what should be done to reduce this gap in terms

of price of treatment, life support systems or medication between

manufacturers and the end users (i.e. doctors or patients)?

47

4) Please help us understand your preference on buying from a

manufacturer or local distributor, and why do you prefer one or both of

them?

5) On what parameters do you judge the credibility of a medical

product?

o Manufacturer or Brand

o Stock position of the company

o Advertisements

o Price

o Quality

6) Do you believe that bridging the gap between manufacturer and end

users like patients or doctors will be beneficial to both parties?

o Yes

o No

7) In case of a product complaint do you prefer contacting the local

distributor or the manufacturer, and how do you ensure that your

complaint is resolved to your expectations? Please elaborate

48

8) Are you aware of the difference between brand names and generic

names?

o Yes

o No

9) We would like to know if you have any other questions you would like

us to work on in order to continue this study?

Your question would be included in to this questionnaire for survey.

Submit

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49

DATA ANALYSIS

RESPONSES COLLATED

The survey had been floated across to experienced medical and healthcare

professionals nationally and internationally.

We have also contacted a few people outside the industry to obtain their views

from a non- judgmental perspective.

Their responses have been collected by means of ―Google Sheets‖.

The following data has been collated from project responses:

1. 90% of respondents agree that quality medical treatment is not affordable

even today.

2. Whereas 10% of respondents think that quality medical treatment is

affordable in today‘s time.

3. 100% of respondents agree that there is scope to reduce prices of medical

treatment, devices and drugs.

4. When asked what should be done to reduce the price gap between

manufacturers and end users 30% of respondents suggest that the

government should fix a ceiling limit for the costs or should implement

proper regulations for pricing policies.

5. 70% of respondents suggest that it is better to purchase goods from a

manufacturer.

6. Purchasing from a local distributor gives an edge to the consumer in terms of

any costs concerning repairs, replacement, and warranty issues.

7. When asked how they judge the credibility of any medical product- 80%

make the judgement on product quality and 20% believe more in the

manufacturer or brand.

50

8. 100% respondents believe that bridging the gap between manufacturer and

end users like patients or doctors will be beneficial to both parties.

9. When asked who they prefer to contact in case of a product complaint, the

response received was mixed. Manufacturers are preferred when it comes to

technical complaint handling and resolving the issue at the base level itself.

On the other hand distributors are preferred when there are issues related to

warranty and replacements.

10. 90% of the respondents are aware of generic medicines. The 10% who are

not aware are not from the healthcare field.

Respondents suggest the following questions for further study:

1. Why Isn't The Government Making Any Efforts To Help The Economically

Backward Sections In Our Country Regarding Medicinal And Hygiene

Development And Execution?

2. How will the end user know about the quality of the product or treatment?

3. How to reduce gap between manufacturers and patient or doctor to reduce

the cost?

4. How will you enrol dental treatment in health insurance?

5. Also study the methods to fill the loopholes in government policies so as to

make medicine branch better.

51

CONCLUSION:

1. It has been confirmed, that there is a distance between the manufacturer and

end user patient and that there is scope to reduce prices.

2. There should be more awareness to among doctors, patients and even

dealers, distributors regarding generic names and brand names.

3. The government should regulate the pricing policies in Medical and

Healthcare product and service providing companies.

4. Global sourcing organisations should be formed for extensive import-

export of medical products.

5. Indigenous manufacturing should be encouraged and promoted.

52

REFERENCES

http://www.businessdictionary.com/definition/product-line.html

https://www.b2binternational.com/publications/distributor-research/

Reasons to Use Distributors

by George N. Root III, Demand Media

http://www.iccnz.com/assets/Reports/Agent-Distribution-selection.pdf

http://cdn2.businesssetfree.com/wp-content/uploads/2013/07/Pricing-Strategy-

Matrix-e1373624580442.png?3d1de4

http://www.globalization101.org/why-do-nations-import/

Medical device tax repeal- http://www.medpagetoday.com/Washington-

Watch/Washington-Watch/52274

Affordable Care Act- http://www.iccnz.com/assets/Reports/Agent-Distribution-

selection.pdf