In reviewing the decision Liderm’s management had to make with the profitability problem of one of their products (Micoderm) with our able Prof. Segun Shogbanmu, it again became apparent that business managers must always have a helicopter view of the dynamics that impact their ability to chart their business decisions in the right direction.
There will always be the constant thug-of-war between business profits and other non-profit driven factors that cannot be discarded with the wave of the hand. In reality, the effects of non-profit factors like public perception, reputational damage and the need to think through the issues from end to end, may have far reaching consequences and the survival of the business may be in jeopardy.
Micoderm, used for the treatment of diaper rashes, was listed on the Spanish Social Security Reimbursement System (SSRS) for €2.37, however, the product was loss making. An attempt 6 years ago to review the prices upwards was not approved by the Ministry of Health (MoH) and prices had been frozen by government to reduce public health spend. Liderm had three options to choose from:
Pull out of the SSRS system and look for profitability from the free market.
Ask the MoH for an upward review of the product price.
Maintain status quo and continue to absorb Micodem’s losses.
For option A, the pros for pulling out is that Micodem had 30% market share with mothers who were not price sensitive. They would not oppose a slight price increase. Also, since businesses are out to make profits, while it was hard to tell how much volume would be lost from the pull out, they could weather the storm outside of the SSRS arrangement. The negatives however are that their major customers (the elderly) and the populace in general, would not take kindly to a price increase and even see it as ‘unethical’ as the elderly would be most impacted, which will shove Liderm’s corporate image to the cleaners. This would also affect the sales of their other profitable products.
For option B, keeping the price as is, was not sustainable as cost would increase 3% annually. While there is a risk that the MoH may not agree to a price increase, from the data given on the prices of other products that are for treatment and not prevention, Liderm still stood a better chance of achieving its dual function and also proposing a new price point that would be acceptable to the MoH and may not be matched by any competitor. Making a strong case for the new pricing showing the 6-year loss trend of Micoderm and the benefit to the MoH (no significant increase to government health spend) could work. The risk remain that Micoderm may be taken off the SSRS and a competitor may take over the slot and grow the market share of their portfolio. There also would be no opportunity to return to the SSRS once Micoderm is removed. The mitigation is to ensure a water-tight proposal that the MoH would accept and Liderm’s reputation is intact as the elderly would not need to pay for the extra cost.
For option C, while Micoderm “accounted for less than 2% of Liderm’s sales”, it can be safely concluded that 98% of the business was doing reasonably well. This is attributable to Liderm’s positioning in the market as it holds the forte for Liderm’s business through its coverage in 98% of the pharmacies in Spain making it easier for the sales team to open new accounts with doctors and pharmacies. It is also the only product with a dual medical function. Other products could remain the profit centres, while Micoderm provide goodwill to support the sale of Liderm’s other products.
While option C seems like the safe option to take as there would be no need to risk a removal from the SSRS platform, it is a temporary unsustainable solution. The best option is to boldly request for a price increase (option B). As analysed in class, moving the price of Micoderm from €2.37 to about €2.79 (based on the transfer of the 3% annual cost increase to the product), makes Liderm the best priced product on the SSRS platform and supports government’s budget spend on health. Acceptance of Liderm’s proposal to the MoH stops Micodem’s losses and protects the market dominance enjoyed by the brand and the Company. The new price of Micoderm could be in the range of €2.70 to €2.90 to at least break even.
Balancing the pressures of business, so it lands feet first could be complex. The notion that the grass is always green on the other side (e.g., exiting SSRS) or just doing nothing to avoid conflict (maintaining status quo) must be carefully reviewed before a business leap is taken that may be irreversible or an opportunity for change, lost.
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