A company has launched a new drug that eliminates the need for sleep. How would you price this drug?
1. Cost of marketing the drug doesn’t matter

2. Drug is safe - no side effects and can be taken indefinitely.

3. Cost of developing the drug doesn’t matter.

These were responses I got to questions I asked during the interview.
+1 vote
1. Cost of marketing the drug doesn’t matter

2. Drug is safe - no side effects and can be taken indefinitely.

3. Cost of developing the drug doesn’t matter.

These were responses I got to questions I asked during the interview.
in Estimation by (13 points) | 574 views

2 Answers

+3 votes


(1) Drug can be used as a single dose (i.e. 1 pill to remove the need to sleep for 1 night) 

(2) Pills can be bought by unit and don't require friction (i.e. user can just buy OTC without doctor prescription) 

(3) We are ignoring any indirect cost to acquire or get the drug shipped 

(4) We assume the value of the drug is based on discretionary use (i.e. not sleeping for 1 or more nights) and not permanent (i.e. we're not seeking to promote a never-need-to-sleep again) 

(5) North Star Metric: drive revenue 

(6) Simple assumption that production costs are variable (and not fixed) so that revenue is simplified as a function of pricing x volume sold  

User Segments & Use Cases 

(1) Students getting prepping to ready for exams (i.e. in crunch mode) 

(2) People who work during the night (e.g. nurses & doctors on call / security & night watchers / bar tenders & DJs / etc.) 

(3) Very busy business people who are either in crunch mode (work deadline) or who are traveling abroad for a very short time and want to avoid being jet-lagged 

(4) Military personal who are on high-alert/standby or in the middle of an operation 

(5) Tech people who in crunch mode or doing a 24h hackathon, etc. 

Most frequent versus Most valuable use cases

When thinking about the user segments and the use cases, and how to price the drug, one has to consider which use cases are considered 'mass market' versus 'premium/exclusive'. At the same time, price is a function that serves a higher-level objective: REVENUE (see assumptions above) 

For example, students would be interested in the drug, but most likely only need it during peak times a few times a year; also their willingness-to-pay might be relatively low (considering they also have existing alternatives like caffeine and other stimulants) 

To better evaluate the opportunity, I would simply create a prioritazation matrix 

Segment SizeFrequency of useWillingness-to-payScorePriority
Night Professionals322121
Busy Professionals 223121
Tech people 11333

Scoring & Priority based on simple multiplication of size x frequency x WTP (with 1 = low / 2 = medium  / 3 = high) 

Now we have a choice: we either FOCUS on a single demographic first; or we decided to DIVERSIFY 

Approach 1: Focus Strategy > here we would probably approach segment 2&3 together (professionals) and better understand their willingness to pay - i.e. how much would a nurse/doctor on call be willing to pay for let's say 15 pills a month (assuming they work 50% of their time during the night with the rest off)? Let's say we do a conjoint study or choice model, that shows us the WTP for a single dose is around $20 per pill (they would basically spend $300 per month to avoid the need to go to sleep during their night shifts) > here we could think of selling monthly PACKS as a monthly/recurring subscription service 

Approach 2: DIVERSIFY > maybe we could adjust the dose for the different segments and depending on the need of alertness people need, increase the price. A student would be charged e.g. $10 for a mini-dose (just helps them to be focused for a couple of nights during their exam period); professionals would pay between $20-50 for a normal dose, whereas military would be charged $250+ for max allowed dose 

0 votes

(I’m not sure this is an estimation question - ‘how would you price’ could imply coming up with a product and pricing/GTM strategy and I would want to clarify that at the beginning of the question) - I'll go with a pricing strategy/GTM answer (would be happy to see an estimation answer)

answer - 

Since the question was about a company launching a drug, I'll assume it's not licensing out the ingredient but it's actually selling a drug. Then the question is, does the company own the IP and developed its key ingredient? or does our company simply license the key ingredient from the IP owner? This is important to understand for the current and future competitive landscape which affects pricing strategy.

Why this drug was developed the first place, did the company, that developed the key ingredient had a target use case/market in mind when they embarked on the R&D? if yes, let's use that market and use case as an example, if not, I will identify several potential markets and use cases where the need for sleep is a problem. and select a market to focus on -  

This could be a long use case discussion - but some come to mind are 

1. B2B - Healthcare i.e. to allow Doctors work longer hours in a single shift, 

2. B2B - Travel, transportation -  i.e.  air travel to keep aircrew and pilots up on longer hauls or reverse routes, truck drivers (there are still a few years until autonomous trucks kick in)

3. B2B - (gov) Police, Firefighters so they can respond faster and be more alert even on night shifts

4. B2B - (gov) Military - many use cases 

5. B2C - Gen-pop - recreational (students to study longer or work , party goers, etc)

Let’s select B2B for profit commercial companies as our target market. B2C is tricky and requires more understanding of the consumer value , value chain and GTM. 

I.e. for B2C these additional questions would be needed - How and in what channels is the drug being sold? online? subscription? Do we own stores/pharmacies? Through 3rd party retail chains? in the latter case, distribution costs will apply, and retialers margin will need to be accounted for. 
Gov markets are tricky form the sales and exclusivity perspective, plus they buy through RFPs which makes pricing a very different exercise.

It would also be good to understand how the drug is actually being used? does it eliminate sleep needs in one magic pill for forever (unlikely, but an option) ? Is it a pill with an amount of dosage that eliminates the need for sleep for some time, how fast? does it require RX? or is it OTC? How is it administered? what is its form factor (Pills, tablets, liquid). Can that dosage be controlled (to allow versioning)? is there a maximum that has been tested and FDA approved? How fast does it work ?Would the person feel rested/normal once its effect wears off or would they need to recover the amount of sleep lost and feel even more tired afterward? this affects some of the possible use cases this drug could address and also the pricing/unit.

Now looking at certain classic pricing strategies and see what could fit our chosen GTM

Cost plus pricing - this traditional retail pricing - adding up manufacturing costs, distribution costs, but taking into account distributor and channel margin, while understanding the amount customer would buy  - this would probably be relevant if we are talking about selling to the general population - this is probably a good fit for b2c pricing - but when looking at enterprise customers, due to their size and amount of product they would purchase, - this is too granular and not profitable for a limited large markets. Also, there’s seemingly a lot we don’t know.

Premium B2C pricing - this is great for niche markets of B2C - High performance executives might be willing to pay a lot to get extra work hours - but again this is not a good fit for price and value aware commercial B2B. And that’s what we are going to target.

Competition/substitute based pricing - this is where IP ownership comes into play, if there are substitues with the same value and same ingredient, we can be more effective operationally and price lower, or provide a different payment model (subscription?), but price-product value alone will not determine eventual success. Pricing for the drug will be dictated by the existing market.

Value based pricing - The easiest case for this discussion is if this is a unique new product - our goal is to maximize willingness to pay and since we are targeting b2b we can understand the value the company puts on obtaining this (bio) technology - i.e, reduce errors in a hospital nightshift, increase speed of treatments at night (or even start providing more complex treatments at nighttime too), reduce HR costs (potentially, depends again on how this drug works).

So the GTM and pricing would be per vertical and per value in each vertical, initially optimized by sales since this is a new product that essentially improves operations for large enterprises. To get  clarity in value, I would  understand willingness to pay after first 1-2 major deals in each vertical, and then version the product according to significant markets/use cases to different industries optimizing for value stories I’d develop based on the first deals. ie. this airline improved operations, increased crew productivity this much resulting in $$$ ops margin increase due to administration of our drug to the crew.

by (17 points)
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