A company has launched a new drug that eliminates the need for sleep. How would you price this drug?

Clarifying questions:

Candidate: How many times does one need to take the drug? Once or twice or thrice a day?

Interviewer: Twice

Candidate: In what format, one has to take the drug? Tablet or injection?

Interviewer: Tablet.

Since google does not have a physical presence, I assume that google would be selling the drug through the online channel.

Business mental model:

In general, cost of manufaturing the drug would decide the floor for the item price. The value that the drug create can be used to decide the ceiling for the item price.

Estimation of cost: I would quantify all the cost inputs: a) Research and Development cost b) Manufacturing cost of the drug c) Distribution cost of the drug d) Markteting cost. 

Estimation of the value that the drug creates: On an average a person requires 8 hours of sleep, if we can eliminate that, we can create a situation where customer can choose how to use that extra 8 hours.

Depending what activities customers value, some customers can use that additional 8 hours for leisure activities and other can use for productive work and still others for combination of both.

Marktet research: I would create a survey mechanism to estimate how would a average customer would use a free time and how much would they use this additional time in dollar terms.

This market research would inform the perceived value of the product to the customers that would decide the profit margin that I would set on top of the item price. 

Conclusion;

In summary, I would use the cost of manufactuing the item to decide the product price and add a margin on top of it based on the perceived value that this product creates for the customers.

Here is my analysis. 

• The pricing of the drug should justify the benefits of the drug ( no sleep) 
• For the purpose of this discussion, I will only consider economic benefits
• An average human sleeps 8 hours a day 
• With this drug, those 8 hours can be used working 
• In the US, lets assume average wage per hour is $15 
  • I think this is a reasonable assumption since most of the work-force works works in service sector jobs 
  • Check : US GDP = $50,000 per capita
  • 50000/365 days / 8 hours = $17 approx
• Economic benefit per day from this drug = 15*8 = $120. 
• Assume one pill per day is needed
• ==> Economic benefit per pill to user = $120. 
• To justify this pill, assume you want a 2:1 benefit/price ratio
• ==> Max price per pill should be $60. 

1. CLARIFY:
   1. Is there an objective I should focus on for the pricing - ex. offset production costs, cheapest option, etc.? You choose.
   2. Are there any other competitors in the market that have a similar pill - aside from standard caffeine pills, coffee, red bull,etc.? You choose. I assume there is no pill like this on the market that completely eliminates sleep needs.
   3. Is the company producing this drug Google? You choose. I assume yes. 
2. PILL OVERVIEW: Google has produced a new drug in the form of a pill that allows users to eliminate the need for sleep. The user takes 1 pill and that pill allows the user to stay up for 24 hours without feeling exhausted, etc. They can function normally / have no side effects. Given that Google's mission is to ensure the world's information is universally accessible, the pill is in line with their goal to allow people to be more productive during their day / learn more. Let's assume that the pill does not require a prescription / can be picked up at a local drug store or retailer. Let's also assume it is for 18+. Finally, let's assume that Google has the ability to mass produce the pill and the individual cost to produce it is not high.
   1. Strengths: No pill like it on the market place that a user can purchase legally. Other agents that someone can purchase legally do not give the same 24 hours feel as this pill does / allow someone to function normally. Easy to take - single pill.
   2. Weaknesses: User only receives 24 hours of no-sleep. Must take the pill every day if desired.
   3. Opportunities: Decrease the number of pills a user is required to feel the same effect. Ex. can the pillar provide 48 hours of no sleep.
   4. Threats: Any other aids that limit the amount of sleep a user needs: caffeine, red bull, etc.. There are also illegal substances that can keep a user awake. No major competitors that have created a pill that offers the effects of this one.
3. USER GROUPS: There are two many user groups we can think of. In this situation, I'd like to focus on the individual consumer, as they will ultimately consume the pill. Let's assume we're focused on the US.
   1. Wholesale Retail Distributors / Drug Stores: Google would sell the pill at wholesale cost to a retail distributor (like Costco) or drug stores. 
   2. Individual Consumer: Google sells the pill direct to consumer. 
4. SUB USER GROUPS: Within the individual consumer user group, there are a few groups of people that may be particularly interested in taking this pill.  Assuming that most people have access to a local drug store, the pill should be physically accessible to these user groups.
   1. College / Graduate Students: Students who need to study long periods of time and don't have much time to sleep. They may also be working a part time job to pay for tuition.
   2. Corporate Finance / Law: Certain corporate jobs require extremely long hours and often require the individuals to forgo sleep - ex. investment banking, Big law work.
   3. Doctors: Certain medical professions require very long hours - ex. surgeons, ER workers, etc. 
   4. Military / Navy: The army, navy, etc. requires long hours without sleep especially when on active duty. 
   5. Personal Guards: Guards are required to monitor entry ways for long periods of time. For example, they may be guarding private property or company property that has sensitive informaiton. May be ex-military.
5. PRICING OBJECTIVE: There are many objectives we can think about with this pill re. pricing. Because it is a new pill, I'd like to focus on gaining market share and growing quickly. (Other strategies include maximizing profit, staying competitive - less applicable because there is only 1 pill that provides this effect now, etc.). 
6. PRICING STRATEGY: In order to maximize market share, I'd like to 1) focus on my user groups and then 2) think about how to price most appropriately for that user group.
   1. Selecting a Sub User Group: In order to choose a sub user group from a pricing perspective, I'd like to understand the size of the market, frequency of purchase, $ a user has / is willing to spend on the pill. Given that I want to maximize market share, I'd like to focus on pricing the pill for my biggest group that will likely purchase the pill the most. Base on my analysis, I see that college / graduate students are the biggest group / most likely to purchase often.

      1. Sub User Group	Size of Market	Frequency of Purchase / Need	$ to Spend
         College / Graduate Students	High	High: Studying for exams and doing research often. Especially with a part time job, could use time.	Low: Generally not wealthy. Jobs are likely research or service industry (pays low).
         Corporate Finance / Law	Low	High: Often working very late.	High: Generally paid very high salaries.
         Doctors	Low	Medium: Have long hours but surgeries are often spread out. Residents on call are usually only on call every other week, 1 / week.	Medium: Depends on doctor's profession / year of residency. Residents are paid very low. Attendings would be paid high. Average to medium.
         Military / Navy	Medium	Medium: Do not need all the time but may have select missions that require little sleep, especially if on active duty.	Low: Assuming focus is on lower level soldiers / seals that may require to be up all night more often.
         Personal Guards	Low	Low: Likely would purchase if they had a big all nighter to prepare for.	Low: May be paid by the hour.

   2. Pricing Strategy: 
      1. Given that I initially want to focus on college / graduate students to maximize market share, I know that my pill must be cost friendly for them, as they have likely little money to spend on the pill. 
      2. Given that we assume the cost to produce the pill is not high, I'd like to focus on a Cost Base Pricing strategy that covers the cost of the pill and allows for a small profit to Google.
7. SUGGESTED PRICING: 
   1. Cost to Produce Pill: Assume $0.10 / pill
   2. College Student Frequency of Purchase: 
      1. Assume a student spends 50% of the month every month in intensive studying time / research time (~15 days) for 75% of the year (when school is in session or 9 months).
      2. 9 months * 15 days / month = 135 days of intensive 
      3. Given the intensive studying time and the pill lasts 24 hours, the student requires 135 pills / year (i.e. 1 pill / day of intensive studying time).
   3. College Student Earnings / Spend: 
      1. Part Time Job Earnings: 
         1. Let's assume a college student is working a part time job at $15 / hour for 10 hours / week. 
         2. Total Earnings: $15 / hour * 10 hours / week * 4 weeks / month = $600 / month (before tax)
      2. Monthly Spend: 
         1. Let's assume the student may have student loans but they plan on paying for those loans after graduation - based on personal observation. 
         2. Average monthly spend may be on books, dining out with friends, etc. Budget below is an assumption / mock up.

         3. Item	Cost / Month (Pre Tax)
            Books	$100
            Dining	$350
            Subscriptions	$20
            Phone	$30
            Discretionary	$100

   4. Pill Pricing: 
      1. If a college student is purchasing 15 pills / month, $1 / pill is $15 / month out of the discretionary budget, representing a 90 cent profit / pill for Google and ~ 15% of the discretionary budget for the student before tax. Given that a student is stretched for funds, they may not want to spend that much of their discretionary budget on the pill. (Testing / research would be required.)
      2. Assuming that the budget of $600 is prior to tax, the discretionary pool is likely a little less than $100. It may more feasible to price the pill at less than $1 / pill - for example $0.50 / pill for a total cost of $7.50 per month ($0.50 / pill * 15 pills per month = $7.50). That pricing would result in a $0.40 profit to Google / pill.
8. SUMMARY: The pill pricing must be focused on gathering market share because it is new to market, which means that the pill must be priced low enough for the focus user group of college / graduate students. Ideally the cost would be under $1 / pill and more than the cost of producing the pill ($0.10 / pill cost) to ensure a slight profit / the pill pricing is not causing Google to lose money based on the mock student budget.

I always like to start with assumptions when answering these types of estimation questions.

Assumptions

(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 

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 

(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.