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How Does One Set a Fair Price? |
AID volunteer Anand Sivaraman describes his dilemma of setting a fair price for a product in his immunodiagnostic firm in Bangalore.
Over the past month, after having relocated to India to work with an immunodiagnostic start-up, I have been confronted by this question time and again. This question assumes a lot of significance, especially, if the product or service that needs to be priced has a market mainly among the most marginalized population in a country.
For the past few months, we have been working on creating a low-cost diagnostic test to measure the status of the body's immune system in HIV infected individuals. Some specifics for the biologist in you - we look at the levels of CD3, CD4 and CD8 positive cells in blood samples of HIV patients. The test reveals useful information that helps a doctor manage HIV infection in patients. Currently, an average patient pays Rs. 1200 for a single diagnostic test which works out to approximately 30 times the average daily wage of a migrant family of a husband, wife and children engaged in temporary jobs at say a construction site in the city.
There are multiple reasons for the high price of the diagnostic test. Before getting into the nitty-gritty details, it is important to differentiate the word "price" into two sub categories.
1. The selling price (Rs.1200) which is the price that a diagnostic laboratory charges any patient.
2. The cost price (typically Rs.700) - This is the price that companies making diagnostic kits (typically multinational company’s kit in India), charge diagnostic laboratories.
Thus, we see that the diagnostic laboratory charges a nearly 70% margin and I do not have specific cost data for an average multinational company (MNC) to suggest possible margins taken by the MNC.
Thus, we realized early that if we are interested in ensuring an alternative low-cost diagnostic assay, we need to understand and work on possible reasons for:
a: The MNC setting a price of Rs.700.
b: The diagnostic laboratory requiring a margin of 70%.
Looking at the possible reasons for setting of the price by the MNC (a) by delving deeper, we get some pretty familiar and some pretty unusual reasons:
1. The cost structure for the diagnostic is based on a third party insurance model that is irrelevant in the Indian context, where third party insurance is not available to the most marginalized.
2. Lack of local production and distribution channels increase the cost.
3. The high cost of labor in non-local production centers (i.e. outside India), increases the cost of the diagnostic kit.
Looking at the margin levels for diagnostic labs (b), some more research that involves visiting diagnostic companies and talking to them about their cost structures provided insight which threw up a very unusual reason. The initial cost of hardware (an equipment called the flow cytometer) needed to run the diagnostic assay forces the diagnostic laboratory to charge a premium as high as 70% to be able to recover the cost of amortization of the equipment.
So how does one go about the process of producing a low cost diagnostic set against this backdrop? We worked on locally producing the antibody reagents, while respecting all patents that had been granted and were able to reduce the cost of an assay kit by at least 10 fold to approximately Rs.70 per test. This after paying royalties for the antibodies to companies with a license for their production! Now, the question arises- what do we charge diagnostic laboratories for this kit? We could allow for "market forces" to set the price - i.e. we under price below the price set by the MNC - and allow for a price war to stabilize the price. But would that be fair?
We met with public health officials to understand what the affordability index of the marginalized communities would be. We also got together all the employees of our company to discuss their perspectives on the issue. As a group, we agreed that we needed to arrive at a price that would also be fair to the employees of our company - i.e. in the event that we do not have cash flows for the next one year - would we still be able to sustain the company and pay fair wages. Having evaluated this event, we decided to charge a "fair price" that corresponds to a previously determined margin, deemed needed for the sustenance of our company (typically 40-50% - came from empirical/ experiential data carried by the founder). That would mean providing the kit for Rs.100 - around seven times lower than the current market price.
But, what stops the diagnostic company from still charging Rs.1200 per assay thereby increasing their margins to more than 1100%? Especially - given that not many diagnostic companies in India are actually capable of providing this assay (i.e. demand woefully exceeds supply). We could also not fault the diagnostic company as they really did need to amortize their capital cost expenditures on the instrument used for the diagnostic kit. We decided to bring together the diagnostic centers in Bangalore providing the test - and had an open discussion with them on this matter. The diagnostic centers agreed to reduce the price to Rs.500 a test (down 700 rupees from the original 1200). This was their perspective on what constituted fair price, keeping in mind their needs.
Therefore, here is one example in the real world on what constitutes fair price - when one looks at perspectives from all stake holders. The People’s Health Movement (PHM) in Bangalore has been campaigning for free diagnostic kits to be provided by the government to HIV patients (info from Prasanna Saligram – AID Saathi). I question the economic sustainability of this approach and I really think that the PHM needs to approach the problem from an understanding of what is responsible for high cost of these kits - rather than from a "free assay to the marginalized" viewpoint. I can't see myself agreeing to their point of view especially after understanding perspectives from all stakeholders - but as they say - it takes many different efforts to change status quo.
In a way - allowing the stakeholders to participate in brainstorming sessions helps define the problem in a more realistic manner. For example - even as we are working on an engineering design to build a low cost flow cytometer, so that every Public Health Unit could carry one, we realized in talking to the diagnostic companies that we needed to simultaneously ensure that every other diagnostic test is optimized to run on the same instrument - from malaria to dengue to TB. By increasing the number of different diagnostic kits that can be run on the same instrument - you are actually decreasing the per unit cost of every test that the center provides - simply by decreasing the amortization cost of the instrument!
Over the past month - I have had the wonderful opportunity to watch many a smile on the faces of relatives of AIDS victims - when they were told that the test would now cost 500 and not 1200, or that the cost of a malaria test would now be Rs.6 rather than Rs.60. Yes, you do sleep better at the end of the day.
Contributed by Anand Sivaraman, Bangalore |
