BCG Interactive Case Interview Practice #2: Drug Pricing
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- čas přidán 23. 07. 2020
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This BCG case interview is a pricing case, which is common in BCG first-round interviews. To pass your consulting interview and land a consulting job offer, it is critical that you practice and master case interviews.
To successfully solve or pass this case interview, you will need to create a framework to methodically go through different pricing strategies, such as cost-based pricing, value-based pricing, and competition-based pricing. Through a combination of these pricing strategies, you will be able to identify an optimal price for the client to set. At the end, you will deliver a case recommendation.
This case is from BCG's interactive case interview library, which can be found at: www.bcg.com/Interactives/ICL/
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2:17 3 great pricing approaches. 1. benchmarking from competitors 2. economic value for customers 3. based on the cost.
we can use a combination of all, based on the cost as lower bound, economic value for customers as higher bound, and benchmarking is in between the lower and higher bound.
3:05 answer 2 suggests that we consider the customer and market before determining the price mechanism.
4:52 answer 2 is more specific than 1. Because it makes distinction for customer segment: patient and doctors.
5:52 different customers may have different motivations and makes different decisions.
7:28 *** the performance difference will determine the pricing.
10:28 know the main buyer --hospital's decision making process and the economic value to the buyers.
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terms:
15:20 economic value, 60 over 2,
terms:
0:35 complication 併發症
0:42 medical condition 醫學徵象相关的「醫療状况」
0:45 Pulmonary embolism 肺栓塞
0:47 major bleeding 嚴重出血
2:33 benchmarking
8:44 Right off the bat 立刻，馬上 immediately, instantly, at once, right away
9:51 a reasonable/ fair ask
10:01 rationale 理由 or motivation 動機
12:00 cost-saving 節省成本
26:22 WTP willingness to pay
30:27 reduce by
reduce(v.): 減少、降低、縮小
reduce to sth: 減少為～、減少到, 所以reduce to $20就是指把價錢減到20元
reduce by sth: 減少了～、減去多少, 所以reduce by $20指的是把價錢減少了20元
32:01 customer segment.
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a higher risk of ...
an established product
---
economic terms:
profit is revenue minus cost.
contribution margin is price minus cost.
Excellent case and excellent explanation!
To add to what you discussed, I think we can include an additional factor to the pricing framework: Company Strategy. This gives you the option to either aim for market share (which is exactly the case) or go for profit. I think it makes the framework more comprehensive.
Thank you so much for this walkthrough. It teaches having a structured solution to the case.
Yup, always good to verify the company's objective before determining the best pricing strategy.
excellent case walkthrough thank you
Really insightful for a management student like me. Thank you and keep uploading.
Thanks Moin! Really appreciate the kind words
questions:
1:09 the client has asked you to set a suitable price for PreventT
1:22 how would you approach the case?
3:09 what exactly would you like to know?
4:06 what exactly do you mean by the demand perspective?
5:11 why do you think it's important to make that distinction?
6:15 Sure, PrevenT will be sold to hospitals. Hospitals got a fixed price for hip endoprosthesis, and are not reimbursed by patients' insurance companies for any complications that arise during surgery. Therefore, they would be interested in reducing complications, and PrevenT helps do exactly that. Is there any further information you would like?
7:43 the client has conducted studies comparing the impact of these two on DVT and other complication of hip endoprosthesis. Details are available in the following table.
9:11 What would you like to do next?
11:14 well, hospitals are very focused on maximizing their profits. this means they maketheir buying decisions based on the drugs' economic value to them. What other information would you need to execute this value-based pricing for PrevenT?
12:27 Okay, let's take another look at the available data for both drugs in the following table, and then calculate the cost savings and economic value.
14:33 calculate the additional economic value of one dose of PrevenT for the customer? Assume that patient will need 30 doses.
15:08 you have calculated the additional amount per dose, which is $2, that hospitals would be willing to pay for PrevenT. What price would you suggest for PrevenT now?
16:27 it seems like a valid suggestion. If the product is priced at 6$, do you think it would be profitable for the client?
17:37 From the data given below, calculate the manufacturer's unit (per dose) contribution margin by manufacturing PrevenT?
18:18 now that you know the unit contribution margin, which is 4$, what is the annual CM that can be expected at this price?
19:35 from the data given below, calculate the manufacturer's annual CM by manufacturing PrevenT.
20:18 look at the information carefully. What are the implication of these new findings?
23:17 the new findings do imply that there are actually two markets for PrevenT -- one comprising high-risk patients, and the other made up of normal-risk patients. what should the client do?
24:41 well, economic value of PrevenT is an important parameter to consider. How do you think the economic value would be affected by the existence of two different markets?
26:06 the client has conducted studies comparing the impact of both drugs on DVT and other complications of hip endoprosthesis. Details are available in the following table.
26:13 you may be right. Further exploration is certainly warranted to see how the price of PrevenT would be impacted by this development.
27:01 we do in fact have data for that. you need to calculate the WTP and price for PrevenT for the new group of high-risk patients. Let's move on to that in the following exercise.
27:17 From the data given below, calculate the maximum price of PrevenT for high-risk group. Assume the number of doses required per patient to be 30.
29:06 we now know that hospitals would be willing to pay up to $14 to use PrevenT for high-risk patients, and $6 for normal-risk patients.
Let's assume hospitals don't have any loyalty and would change drugs for any amount of savings, no matter how small.
To keep PrevenT from capturing 100% of the market. Clearvenax maker would lower its drug price. In this case, what should be our client's competitive response to drive Clearvenax out of market?
31:00 Correct. If PrevenT reduces its price by $3. Clearvenax would have to sell its drug at $1. Which would not be affordable because its production cost is also $1. What would this imply for the price of PrevenT for normal-risk and for high-risk patients?
32:22 Correct. If PrevenT reduces its price by $3, Clearvenax would have to sell its drug at $1. which would not be affordable because its production cost is also $1. What would this imply for the price of PrevenT for normal-risk and for high-risk patients?
35:56 in that case, what would be your final recommendation on pricing and the group of patients to target?
Smashed it!
Thank you, I have my interview with BCG consulting in my home country, Nigeria tomorrow, this has greatly helped. Hoping for the best!😊
Wishing you the best! Let us know how your interview went!
Hello Praise, I have similar test on the 14th of this month, please your feedback will be appreciated. It will be a good tips for better preparation. Thanks. I wish you the best.
@@taiwoolalekan3112 hello taiwo I have same interview on 14th, how is your preparation? Can we link up through linkedin, please let me know if this is your name on linkedin
@@ezeijeomaugochinyere3144 yes that is my name on LinkedIn
@@ezeijeomaugochinyere3144 I have the same test tomorrow, the 14th. Can we still do a group prep? I hope I'm not too late.
3:05 the price need to be 1. competitive (need to know more about the market and competition); 2. economic value to customer (need to know the customers and product); 3. cover costs and ensure a profit margin (production cost)
2:52 pricing mechanism: price elasticity of demand; negotiation between buyers and sellers.
3:26 "whether the company has a monopoly in the market" still cannot lead to the optimal number of people we can get to maximize revenue: not relevant
4:15 a difference between end users and target buyers
4:22 the distinction is important because the needs of doctors and patient in terms of buying drug will vary.
5:31 purchase decisions
5:44 so again the market size doesnt help to determine the price. it is irrelevant.
6:34 does using that have any downsides? 缺點
6:51 we already know how much the drug is priced at. so if PrevenT does a better job/ performs better, then we should be able to charge a higher price.
10:23 **What is hospital's decision making process on drugs and what is economic value that drug provide hospital.
10:41 ** while cost is important, the logical next steps are to ...
12:15 the hypothesis as to which directions we lean towards.
12:09 ** I'll need to calculate the cost-saving per patient reducing complication related to the surgery, and then determine economic value of one dose comparison.
14:52 60 over 30 is 2 (60除以30是2) so each dose gives an additional economic value of 2.
15:30 the hospital will be willing to pay up to 6 dollars to perferred PrevenT. because overall it performs better.
15:43 2 dollars is the economic value that it provides over Clearnex.
16:41 We've looked at the economic value of the drug, now we need to see the production cost of the drug.
17:27 although it based on economic value which says nothing about the profitability or production cost.
17:56 contribution margin is price - cost. that is, in other words, for every dose the client sells, they make 4 dollars in profit.
18:40 I need to know the number of dose per patient annually and how many patients annually.
19:57 we do calculation by taking the price and subtracting the cost per dose.
20:58 the new segment for high risk patients represents 200,000. compared to 800,000 for normal risk patients.
24:06 but leaning towards answer 3 here because ... (???)
25:18 the economic value of PrevenT would be higher for hospitals in case of high-risk patients. therefore, the client can charge a higher price for PrevenT.
27:42 both drugs have the same rate, so no incremental economic value being delivered.
29:37 PrevenT will need to lower the price of same amount(contribution margin) to keep the better economic value to be purchased by hospitals.
32:28 This is related to profits, which group generates more money. We know profit per dose is higher in high-risk patients, but the amount is 200,000 while normal risk amount is 800,000. One group is higher profit margin per dose, while the other is larger group.
34:51 i'd like to know a little more about the reasons behind your recommendation. why would you market the drug for high-risk patients only?
35:56 in that case, what would be your final recommendation on pricing and the group of patients to target?
Thank you for this amazing explanation, it's been very helpful!
Thanks Elif!
Question No. 24 - Asked about total savings using Prevent T compared to Clearvenax : 1600x(20%-10%) + 2500x(1%-3%) + 1250x(1%-5%) = 60
Q No. 62 : (1600x(25%-5) + 2500x(2%-2%) + 1250x(1%-3%)) / 30 Doses required for per patients = $ 9.833 economic value has provided. But Clearvenax has sold off their SKUs by $4. So value would be : ( $ 9.833 + $ 4) = $13.833
Thank you! Great case. Just wondering if one outcome could be to launch 2 different products in order to capture both the low and high risks patient market ?
I think trying to price discriminate in this type of market will be difficult. You'd basically be trying to sell the same identical drug to two different patient groups at two different price points. There will likely be government regulations to prevent this from happening and patients and physicians likely won't approve of this pricing practice.
Fair points. Thank you for your insightful feedback. Appreciate it.
I am confused about the calculation at 13:50 (ish). At the beginning of the case, it was said that DVT may lead to PE and bleeding. Wouldn't that mean that people treated for PE/bleed also need treatment for DVT? How come then that we can treat all three conditions as independent?
(If you account for co-coccurence of DVT and PE/bleeding the savings are 153.75$ per person...)
On the final contribution margin calculation, shouldn't the lower price option include the revenue from the 200,000 high risk patients? If PrevenT is a better choice compared Clearvenax then hospitals would purchase PrevenT for both normal and high risk patients. It doesn't change the conclusion in this case, but if profit margin was $1 more for PreventT it would change the recommendation in favor of the lower price.
No, you shouldn’t. Because they are only going to market the drug for either high risk or low risk patients. So their package insert would probably only have indication for one or the other and not both. Could a doctor still use it off label? Of course, but that would be rare, especially for a new drug.
First of all, thank you for the great content!!
I was wondering, don't you think that at minute 9:10 (after the first table) we have all the relevant info to understand how the hospital would buy their drug? I think it is pretty intuitive that hospitals would prefer the drug - at the same price level - which provides the most cost-saving (ie. PT)... Therefore, I would have gone with answer 3 and start looking at the costs. (Indeed, later on with the second table they give you again the same data. It almost looks like it's the same choice "doubled")
What do you think about this? Going back, would you have chosen answer 3 or not?
Thank you very much for the clarification :)
Also, is there a part missing at 26:08 perhaps? Thanks :))
7:46 Let's take a look at this table. --> how you should talk on the table.
8:27 *** so PrevenT is only better at DVT and worse at preventing complications for PE and major bleeding.
8:47 *** so right off the bat here, we can calculate the economic value of PrevenT. we know the difference between complication rates and also the cost of complication. So we multiply the difference and cost, we can know how much PrevenT either save or cost the hospital, compared to the other drug.
13:58 so overall PrevenT saves the hospital 160 on DVT, it costs hospital 50 on PE and 50 on blood. So net overall the economic value on PrevenT is 60 dollars. In other words, if the hospital uses PrevenT instead of Clearnavax. On average on patient, they should expect to save 60 dollars.
21:31 looking at it overall, it seems like PrevenT is actually delivering more economic value for high-risk patient segment.
21:50 this suggests that we have 2 customer groups or patient groups. the hospital might want to pay a higher price for this high-risk patients because the economic value delivered to these patients are higher.
22:06 PrevenT is more effective for high-risk patients. this info is relevant and should be considered.
28:12 295 divided by 30 is roughly rounded 10 dollars.
28:26 the economic value is 10 dollars above clear. thus 10 plus 4, which is the clear price, equals 14, the maximum final price per doses.
33:14 this table provides the necessary data to calculate the manufacturer's contribution margins for normal-risk and high-risk patients.
33:38 manufacturer contribution margin per annum.
33:57 If we are forced to only target one type: either normal or high-risk. it would make more sense to do high-risk group
34:19 Look at the information below carefully. Now that you have the price and CM for both groups of patients --normal-risk and high-risk-- what approach would you recommend to market PrevenT?
One thing I would add to my recommendation is that it would be worth not abandoning the normal risk patients market as we would concede the market to the competition. Knowing we also have a competitive advantage on that segment means we should not leave it untapped. Thoughts?
Can anyone help me understand why did we divide 60 by 30? How to discover the economic value of the product?
Every patient needs 30 doses, and the econ value of each patient using 30 doses is $60. So the econ value of each patient using each dose is 60/30=$2.
We calculate the econ value by seeing how product B saves the complication costs as compared to product A.
This might seem like a silly question, but what format are these interviews normally done in for a real job? Are they online, in person or in an assessment centre of some sort? I also wondered if I should be practiced in doing all these calculations in my head, written down or with a calculator. Do they typically allow you to use any aids like calculators in the interviews?
I recommend you to go to r/consulting on Reddit, read the wiki pages to get an idea of case interviews. To answer your questions briefly, the format depends on the situation (COVID-19, then online), the company, the interview round, etc. You will always have to do mental arithmatic, but don't stress out since the numbers are usually convenient to figure out mentally (like in the vid). Yes, you will need to practice it all the time
start from 10:00 it's hard to follow the thought process.
29:06 this part is also too hard for me.
36:51 *** we priced a little less than $11 and $11 is because we want to drive Clearvenax out of the market and get a 100% market share.
37:09 so it summarizes all the take-away 重點、結論 and rationale動機 for the price and customer segment.
37:32 It grades on rigor 精密, structuring, business judgement, and synthesis.
38:04 you can systematically identify the optimal price with this framework and logical rational thinking.
Super Vidéo! Je prépare un entretien pour le BCG Paris, si certains veulent s'entraîner avec moi je serais ravie!
Thank you!
Bonne chance!
At 8:20, the other drug is also saving $60 then how can we say PrevenT is better than it? Somebody pls help me clarify this. Thanks.
The economic value, in this case, refers to the "additional" value that PrevenT generates. For example, if Clearvenax serves to save $3, and PrevenT serves to save $10, then the economic value of PrevenT is $7.
In other words, a consumer would be saving $7 by switching from Clearvenax to PrevenT, and that is the economic value.
I can't seem to get the final score to load lol. Shame - I thought I did rather well.
Likewise... Thinking there might be a bug
I can also concur
I highly disagree that the distinction between patients and doctors is important. Isn't it evident that this is likely going to be a prescription drug and not an over-the-counter medicine, so our target group is doctors?
too easy... anwers are obvious. You can offer hiring to me.