Page 2 - CIMA SCS Workbook November 2018 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

Cost plus is therefore not an appropriate strategy for Novak.

Going rate

This strategy tends to be used when several suppliers of the same product cannot distinguish their
product from those of competitors, and therefore a common price is charged across the industry.
For example, if 2 petrol stations are located close to each other, they will tend to charge the same
price per litre for petrol or diesel; the motorist does not distinguish between different brands,
being motivated instead by the cost per litre. It therefore makes no sense for one retailer to
charge a higher price than the competitor, as this will simply lead to customers choosing the other
provider. Nor is constantly reducing price a logical move, as margins on petrol are small and both
businesses will fail to be profitable. A happy status quo therefore tends to emerge, where both
retailers charge the same price and make decent profit.

This does not apply to Novak as, by definition, each of its products is unique. It cannot therefore
be argued that there is a “market price”.

Price discrimination

This practice occurs where the same product is sold into more than 1 market at different prices.
For example, Novak may sell Mintac at C$5.27 per tablet in Cronland, but at a higher or lower
value in other parts of the world, depending on market conditions. Developed economies may
well be able to afford higher prices, but subsidised prices may need to be charged if developing
economies cannot afford the “standard” price.

To an extent Novak is already involved in this; examples such as giving away 20 million doses of
Kartiam to combat malaria in developing countries, thereby charging a price of zero, would be
different to where the same drug is actually sold elsewhere.

For price discrimination to work we would have to be happy that appropriate barriers exist to
prevent transfer from 1 market to another. For example, we would not want to sell drugs at half
their normal price to one country if that customer were then to sell to another country at a mark-
up, but still cheaper than if that second country were to buy direct from Novak.

Penetration pricing

This is a pricing strategy of deliberately charging low prices when a new product is launched to be
competitive against rivals and build up market share. Given the specialised nature of all Novak’s
new products when first launched, and the availability of patent protection, this is not necessary
and would simply lead to sub-optimal profits being earned.

When a product goes off-patent, however, the market for that drug is opened up to competition,
and there is an argument that suggests that penetration pricing might work for what is now a
generic drug. However, Novak would still have the use of the drug’s trademarked name, which
cannot be copied by rivals, and consumers may feel that it is worth paying a higher price for the
original Novak drug than a cheaper alternative sold under a name that is not recognised. This
strategy is therefore not recommended.

Negotiated pricing

Given the power of authorities such as the PRA to determine the success of new products, it
might be worth considering negotiating with them to agree a price that is mutually acceptable to

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