Adapted from Marc Cosentino’s Case In Point, 8th Edition, pages 115-118:
The client is a large pharmaceutical company that has discovered a cure for baldness and thinning hair. It is a pill that will restore a full head of hair in three months. The pill needs to be taken every day to maintain the hair’s thickness. Estimate the size of the US market and tell me how you would price the drug.
Clarification Questions
Are there any additional objectives?
Focus on profits over market share.
Are there any restrictions on usage or side effects?
The pill can be taken by both men and women. It causes sexual dysfunction in 2% of men. Women who are pregnant or may become pregnant should not use it because it may cause birth defects.
Is it covered by insurance?
No. It is also prescription, not OTC.
Market Size
I’ll start by estimating the size of the US market. Who are our potential users?
- men with male pattern baldness
- women with thinning hair
- people who may want thicker hair for cosmetic purposes
- medical patients such as cancer survivors
I’ll assume that the US population is 320 million, with the population uniformly distributed across age groups and an average life expectancy of 80. I’ve divided the population into four age cohorts by gender. Therefore, each cohort represents (320 / 4 / 2) = 40 million people. The likelihood of each cohort using the pill is presented in the following table:
| Age Cohort | Male Use Rate | # Male Users | Female Use Rate | # Female Users |
|---|---|---|---|---|
| 0-20 | 0% | 0 | 0% | 0 |
| 21-40 | 20% | 8 m | 2% | 0.8 m |
| 41-60 | 30% | 12 m | 5% | 2 m |
| 61-80 | 25% | 10 m | 5% | 2 m |
| TOTAL | 30 m | 4.8 m |
For men, I believe it is reasonable to expect that 1 in 5 men in the 21-40 age range will be interested in the product to remedy male pattern baldness. These men are also likely to have a steady income to purchase the pill and have the social motivation to maintain a thick head of hair. The incidence of baldness will increase in the 41-60 group, and the same motivations should justify the 30% potential use rate. The use rate may drop to 25% in the 61-80 cohort as retirement becomes a factor and disposable income becomes more restricted.
The story is different for women. The likelihood of baldness in women is much lower than it is for men. However, a small percentage of women (2%) may potentially take the pill for cosmetic purposes in the 21-40 cohort. The risk of birth defects will likely keep usage rates low in this group. As women age, thinning hair may become a more prominent issue, and use will increase to ~5% from 41-80.
In total, I estimate a potential market size of 34.8 million in the US.
Pricing Strategy
There are three pricing perspectives we should consider: competitive pricing, cost-based pricing, and value-based pricing.
1. Competitive Pricing
- Who are our competitors? What are they charging?
- What substitutes are available to consumers, and how much are they? (transplant procedures, even wigs?)
There are two competitors:
- a topical solution (e.g. Rogaine) that sells for $60 for a month’s supply
- a different pill that sells for $50 for a month’s supply
2. Cost-Based Pricing
- How much was R&D?
- How much does it cost to manufacture the pill?
- How much will we spend on marketing costs?
R&D costs were practically negligible since the product was discovered unintentionally. It costs $1 to manufacture a month’s supply.
3. Value-Based Pricing
- How much are customers willing to pay to restore their hair?
- What is our product’s unique value proposition, and how much is it worth?
Putting all three perspectives together, we see that cost-based pricing will not be an issue. Instead, I’ll focus on competitive and value-based pricing. Putting these two approaches together, I’ll gauge our product’s strength against both alternatives.
Compared to the topical solution, our product differs in the following ways:
- (+) More effective
- (-) Side effects not caused by topical solution
- (-) Requires doctor’s visit to get prescription versus an OTC product, i.e. time-consuming to obtain
- (+/-) New product
However, the people taking the time to seek out our product are likely to have already tried the existing topical solution and experienced disappointing results. Therefore, our product’s effectiveness should serve as an important differentiator that will allow us to charge at a premium to the topical solution’s $60.
Compared to the competitor’s pill, we offer three times the effectiveness. Again, this justifies a premium over the competitor’s $50 price.
In general, I recommend that the product be priced at upwards of $70 for a month’s supply. The premium price will also hopefully signal higher quality to consumers. To put this price in perspective, Latisse, a serum that claimed to encourage the growth of longer and fuller eyelashes, retailed from $89-$150 for a month’s supply shortly after its debut in 2010.
However, I’d like to take the pricing strategy one step further. I can foresee skepticism and unfamiliarity with the product being significant barriers to purchase for first-time buyers. Therefore, instead of pumping money into a huge marketing campaign, I suggest creating a Starter Pack that can be purchased only once per customer at a lower introductory price.
It is important that this bundle include 3 months of supply, enough for the customer to experience full results. Clinique’s product, the Even Better Clinical Dark Spot Corrector, has faced criticism for disappointing its customers because of a poor packaging strategy.
Most first-time buyers prefer to buy the smallest size to minimize spending on an untested product. However, using the entire 1.0 oz bottle will not achieve significant noticeable results. It takes complete use of the largest 3.4 oz bottle, which costs $138, to achieve full results. As a result, most first-time customers are disappointed by the product and choose not to repurchase.
Therefore, I stress that the Starter Pack should include 3 months of supply. This bundle can be priced at $149, which would be comparable to the competition’s $50 price point. After the Starter Pack, a month’s supply would return to its original price of $70. I believe the product’s effectiveness will convince customers to continue purchasing the pill even at the higher price. The emotions and process related to losing the hair again should also be strong enough to discourage customers from discontinuing the pill after the 3-month mark.
Summary
We identified a potential market size of approximately 35 million in the US. We created a pricing strategy that addressed both competitive prices and product characteristics. Furthermore, we created a pricing structure that should help mitigate some initial hurdles for this new product. At an introductory price of $149 and a subsequent monthly price of $70, at a 1% penetration rate, we can expect revenues of over $50 million from introductory sales alone and a maximum of approximately $270 million in revenues in the first year.
Credits to Galina Klimova and Kaden Lee
K Does Cases 