My advice to Jorge

We treated a case in the analysis of business problem. It is about a company called Liderm and the dillema of the general manager; Jorge Serna. Jorge was satisfied with how the fiscal year was evolving; sales had increased by 20% and several R&D project currently in the pipeline were making progress. Liderm was Spain’s leader in the field of medication and cosmetic products for the treatment and prevention of skin related pathologies.

To build on this positive momentum Jorge had requested a management meeting to discuss the prospect of Micoderm. Micoderm is one of Liderm’s better-known products for the treatment and prevention of diaper rash. The future of the product has come into question over the last six years since the health ministry had shut down a request to increase its selling price.

The product which at the time was barely profitable, was losing money in 2010 and Jorge thought the issue required immediate action. One alternative would be to take Micoderm out of the SSRS. Through that system, Spanish citizens are entitled to discounts on medications. The second option is request for a price increase from the Health Ministry and the third option would be to continue selling at the current low price while absorbing the losses.

None of the options are easy and each of them come with its risk. Requesting for a price increase seem the best option to me. Since the term of being listed in the SSRS also made provision for a price increase, provided the company provides data to justify it. Liderm had requested for a price increase five years ago but it was turned down. And it was turned down because the Government was experiencing economic down time and couldn’t afford to pay more.

Jorge has his fears; if he goes to request for a price increase again, the Health Ministry might take micoderm out of the SSRS. Micoderm is a preventive and treatment medication and its treatment properties is not as high as its preventive properties. To qualify to be on the SSRS list, the medication has to be a treatment medication, and not a preventive medication. Micoderm is the only diper rash treatment medication on the SSRS.

Being on the SSRS is a big boost for Liderm as it generates two percent of sales and two times the revenue of other products Liderm has in the market. It is very cheap compared to other medication in its category. It comes highly recommended by doctors in public hospitals and also highly recommended by pharmacies due to the wider profit margin it gives.

So even though, micoderm generate sales for them due to being listed on SSRS, Liderm cannot arbitrarily increase price unless approved by the Healthy Ministry. Meanwhile the cost of production of one pack of micoderm is 1.62 euros and Liderm’s selling price has been pegged to 1.56 euros. Even at that, the production company has informed Liderm that the production cost will increase by three percent annually for the next four years.

I will advice Jorge to go and request for a price increase again and propose a selling price of two euros. And should the health ministry victimize them for that, by taking them out of the SSRS list, then they should do a campaign for price increase and loyalty plea as they enter the free market. All the best to Jorge and Liderm