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E-Folder - Understanding Value
What is value?
Value is the key to profit. Understanding value can tell you a lot about how to generate greater profits in any business.
Profit is the difference between your costs and the price you get for something – anything – in the marketplace. A good way to think about this is:
Price
- Cost =
Profit
This means that great profits always come from a good understanding of your costs and pricing, but that can be much more difficult than it sounds.
Profit can be thought of in a lot of different ways, but it’s important to understand the role that profit plays in capitalist societies to really get a handle on the thing. The purpose of profit – in a free market – is to
Value is the key to profit. Understanding value can tell you a lot about how to generate greater profits in any business.
Profit is the difference between your costs and the price you get for something – anything – in the marketplace. A good way to think about this is:
Price
- Cost =
Profit
This means that great profits always come from a good understanding of your costs and pricing, but that can be much more difficult than it sounds.
Profit can be thought of in a lot of different ways, but it’s important to understand the role that profit plays in capitalist societies to really get a handle on the thing. The purpose of profit – in a free market – is to
According to USFDA, a combination product is one composed of any combination of a drug and device; biological product and device; drug and biological product
attract people and investment to activities that are valuable to others. Period. This means that most businesses that have issues with profitability are most likely having issues with one of the following items:
1) Pricing
2) Getting customers
3) Controlling cost
4) Creating value.
Many people in business get hung up on the concept of controlling cost, and cost is given far more attention than it deserves. The reality in most industries is that cost, while usually important, is not the MOST important factor in the customer’s buying decision. The reason people tend to focus on cost cutting is that it’s easy. This is exactly the wrong sort of thing to do if you want
1) Pricing
2) Getting customers
3) Controlling cost
4) Creating value.
Many people in business get hung up on the concept of controlling cost, and cost is given far more attention than it deserves. The reality in most industries is that cost, while usually important, is not the MOST important factor in the customer’s buying decision. The reason people tend to focus on cost cutting is that it’s easy. This is exactly the wrong sort of thing to do if you want
; or drug, device, and biological product and fixed dose combination would include two or more combinations of drug.
Examples of combination products may in
Examples of combination products may in
o make insane profits.
The secret of insane profits
As you might have guessed from the previous paragraph, insane profits are simply a matter of creating huge value for a group of customers who have money to spend. By the way, that last bit about having money to spend is really important. I know people who have built grand schemes of enterprise around customers who basically have little or no money to spend, only to fail because the money just isn’t there. Remember what Willie Sutton said when asked why they rob banks:
“Because that’s where the money is”
Creating value can be simple and easy, or it can be difficult. Many people can do simple and easy value creation, while very
The secret of insane profits
As you might have guessed from the previous paragraph, insane profits are simply a matter of creating huge value for a group of customers who have money to spend. By the way, that last bit about having money to spend is really important. I know people who have built grand schemes of enterprise around customers who basically have little or no money to spend, only to fail because the money just isn’t there. Remember what Willie Sutton said when asked why they rob banks:
“Because that’s where the money is”
Creating value can be simple and easy, or it can be difficult. Many people can do simple and easy value creation, while very
lude drug-coated devices, drugs packaged with delivery devices in medical kits, and drugs and devices packaged separately but intended to be used together.
ew will do difficult or complicated value creation. The difficult stuff will almost always make you more profit, if you understand how to charge for it. This is really important to you because you need to be aware of the effects of competition. Consider this question: What is a glass of water worth? If you are sitting at home or in your office right now, a glass of water probably isn’t worth all that much to you. Maybe a nickel, on the outside. Why? Because you can easily walk over to a faucet and, for less than a nickel, fill a glass with water without spending a lot of time or having a lot of knowledge about water. Let’s consider, on the other hand, what that water would be wor
here is enormous increase in the number of combination products entering the market in the recent years. Combination products have proven advantages but fixe
h to you if you were in a plane crash in the desert. The alternative wouldn’t be there, and the need for water definitely would be there. If I were standing next to you with the only glass of water for 100 miles, you’d put a much higher value on that glass of water. This leads to an important concept about value:
Your available alternatives define value
In other words, where there is an easily available substitute for anything – goods or services – most customers will value them about the same. This is one reason why banks tend to offer very similar interest rates and airlines tend to offer very similar fares. If you don’t see a difference between two options, why would you pay m
Your available alternatives define value
In other words, where there is an easily available substitute for anything – goods or services – most customers will value them about the same. This is one reason why banks tend to offer very similar interest rates and airlines tend to offer very similar fares. If you don’t see a difference between two options, why would you pay m
d dose combinations are still in the process of convincing regulatory authority on their advantages over the single ingredient formulations.
Combination pro
Combination pro
re for one than another?
This is exactly where competition comes in. When you do something easy that creates value, a competitor can do the very same thing – and might do it for a nickel less just to get the customer. The limit to most competitors’ willingness to cut price is almost always defined by cost. This means that most competitors will cut their prices to take customers away from you up to the point where they start losing money on the deal. Of course, if you look at this another way they are giving up their profits for customers, but most competitors in most industries will actually do this, thinking that volume sales will somehow make up for the loss. The reality of this
ucts have become life saving products for the pharmaceutical companies who doesn’t have many innovative molecules in their product pipeline and have been inc
situation can easily be understood by considering a lemonade stand.
Let’s say you run a lemonade stand and you are using lemonade mix, glasses and a whole bunch of other stuff that puts your cost per glass of lemonade at 20 cents. You decide you will charge 50 cents a glass for your fine lemonade, so you have a profit picture that looks like this:
Price=$0.50
-Cost=$0.20
Profit=$0.30
When we look at any enterprise with more than one sale, we have to add up all of the sales and all of the costs to get a total profit picture. A good way to think about this is:
Sales=Units X Price
For lemonade, the “unit” is a glass of lemonade, so:
Sales=Glasses of lemonade X Pri
Let’s say you run a lemonade stand and you are using lemonade mix, glasses and a whole bunch of other stuff that puts your cost per glass of lemonade at 20 cents. You decide you will charge 50 cents a glass for your fine lemonade, so you have a profit picture that looks like this:
Price=$0.50
-Cost=$0.20
Profit=$0.30
When we look at any enterprise with more than one sale, we have to add up all of the sales and all of the costs to get a total profit picture. A good way to think about this is:
Sales=Units X Price
For lemonade, the “unit” is a glass of lemonade, so:
Sales=Glasses of lemonade X Pri
easingly used in the product life cycle management. Even the companies having product patents are trying to extend their product life cycle through the combi
e
Let’s say that there are 100 customers who buy lemonade every day in this neighborhood. Yeah, my neighborhood was never that good when I was a kid, but we are pretending so work with me on this. This means that your total profit picture looks like this:
Sales=$50.00
-Cost=$20.00
Profit=$30.00
Let’s say one day Evil Egbert sets up a stand right next to yours. Let’s assume that you have the same costs – you both run to the corner store and buy lemonade mix that ends up costing you about 20 cents per serving. When you open your lemonade stand, your profit picture may look like this:
Price=$0.50
-Cost=$0.20
Profit=$0.30
Now, of course, Egbert, being a competit
Let’s say that there are 100 customers who buy lemonade every day in this neighborhood. Yeah, my neighborhood was never that good when I was a kid, but we are pretending so work with me on this. This means that your total profit picture looks like this:
Sales=$50.00
-Cost=$20.00
Profit=$30.00
Let’s say one day Evil Egbert sets up a stand right next to yours. Let’s assume that you have the same costs – you both run to the corner store and buy lemonade mix that ends up costing you about 20 cents per serving. When you open your lemonade stand, your profit picture may look like this:
Price=$0.50
-Cost=$0.20
Profit=$0.30
Now, of course, Egbert, being a competit
nation products and maximize the revenues. But the companies involved in this practice are overlooking that they are burdening the patients both economically
r, is evil and cannot abide the thought of you making money. So Egbert decides to steal your customers by lowering his price. Customers, being who they are, will sometimes switch for a lower price – but some will not. Let’s say Egbert decides he is happy with this profit picture:
Price=$0.40
-Cost=$0.20
Profit=$0.20
You will almost certainly lose some customers to Egbert over this. And who can blame them? The customer is getting exactly the same lemonade for 10 cents less – what a bargain! Now here is where the real world gets tricky: some customers will not switch, and will prefer to buy from you. Why? I’ve given up trying to understand, but it’s absolutely true. S
Price=$0.40
-Cost=$0.20
Profit=$0.20
You will almost certainly lose some customers to Egbert over this. And who can blame them? The customer is getting exactly the same lemonade for 10 cents less – what a bargain! Now here is where the real world gets tricky: some customers will not switch, and will prefer to buy from you. Why? I’ve given up trying to understand, but it’s absolutely true. S
and physically. They need to rightly judge the benefits of the combination products and they have to even look at the risks involved when combining the produ
me people, given the choice, will still pay more for something than the lowest price available. Perhaps they like your eyes. Or they just can’t be bothered to go the extra 5 steps over to Evil Egbert’s stand. Who cares? You keep those customers even though you have a higher price. Sound good? It is. All other things being equal, most of the customers will buy from Evil Egbert, let’s say he gets 80 of them. You, due to your charm, witty sales banter, and excellent location, still hang on to 20 customers. This means that your total profit picture looks like this:
Sales=$10.00
- Cost=$4.00
Profit=$6.00
While Egbert’s total profit picture looks like this:
Sales=$32.00<
Sales=$10.00
- Cost=$4.00
Profit=$6.00
While Egbert’s total profit picture looks like this:
Sales=$32.00<
ts. Some of the combination products were well accepted by physicians while others suffered. Companies involved in development of combination products are fi
r>
-Cost=$16.00
Profit=$16.00
As you can see, Egbert is making more money than you are. Since evil never wins, you want to get some of those customers back. You cut your price to 40 cents, just to match Egbert. What happens? Very likely, you and Evil Egbert end up splitting the market right down the middle, with 50 customers each. This leaves both of you with a profit picture that looks like this:
Sales=$20.00
-Cost=$10.00
Profit=$10.00
Think about what has happened here. When you started, you were making $30.00 a day selling lemonade. Egbert came in and cut your profits to $6.00 a day – so he could make $16.00 a day. And when you matched his price, you both e
Profit=$16.00
As you can see, Egbert is making more money than you are. Since evil never wins, you want to get some of those customers back. You cut your price to 40 cents, just to match Egbert. What happens? Very likely, you and Evil Egbert end up splitting the market right down the middle, with 50 customers each. This leaves both of you with a profit picture that looks like this:
Sales=$20.00
-Cost=$10.00
Profit=$10.00
Think about what has happened here. When you started, you were making $30.00 a day selling lemonade. Egbert came in and cut your profits to $6.00 a day – so he could make $16.00 a day. And when you matched his price, you both e
ding difficulty in defining their combination products and facing various challenges from selecting a combination to marketing it.
Following aspects would a
Following aspects would a
ded up making $10.00 a day. In this example, the total profit that ALL lemonade sellers in your neighborhood made went from $30.00 (when it was you alone), to $22.00 (when Evil Egbert came in a cut prices) and finally to $20.00 (when you were both priced the same and had $10.00 of profit each). The lemonade didn’t change, and the customers didn’t change, so what ate up that profit?
Competition Eats Profit.
A. Creating Value
One of the most important elements of profitability is value creation. If you go to a grocery store and buy something from that store (say a box of dog treats), you won’t be able to stand outside the store and sell the box of dog treats for more than you paid f
Competition Eats Profit.
A. Creating Value
One of the most important elements of profitability is value creation. If you go to a grocery store and buy something from that store (say a box of dog treats), you won’t be able to stand outside the store and sell the box of dog treats for more than you paid f
dd to the challenges in developing combination products:
Which markets to tap where the combination products can do fairly well?
Which combination prod
Which markets to tap where the combination products can do fairly well?
Which combination prod
r it. This is simply because the box of dog treats sold just outside the store isn’t worth much more or less than the same box inside the store. In one sense, this is because you are competing with the store by selling the same products that the store sells in a nearby location. But, more basically, you simply haven’t created any value. To the customer, your box of dog treats is worth no more nor less than the one in the store. You can only get most customers to buy your dog treats for more than they would pay in the store if you add value in some way. Here are some things that might add value to your dog treats:
You take them out of the box and feed them to the dog
You impr
You take them out of the box and feed them to the dog
You impr
cts are meaningful and rational?
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
Which therapeutic categories to select?
Which Combinations can address unmet needs of the patients?
Do combin
ve them by sprinkling sugar on them
You put them in a different box that looks nicer
You make the customer feel good about buying from you
You give the customer a hug for buying from you
You sing while selling the dog treats
Hopefully, you get the idea. You can improve the product, change the packaging, or do anything you like to improve the customer’s total buying experience – any of these things will add value. Perhaps not a ton of value – maybe only a nickel or two per treat. But if you sell enough treats, this can certainly add up. And you will certainly have a better ability to make money on whatever you sell than your competitors.
B. Achieving Uniqueness
You put them in a different box that looks nicer
You make the customer feel good about buying from you
You give the customer a hug for buying from you
You sing while selling the dog treats
Hopefully, you get the idea. You can improve the product, change the packaging, or do anything you like to improve the customer’s total buying experience – any of these things will add value. Perhaps not a ton of value – maybe only a nickel or two per treat. But if you sell enough treats, this can certainly add up. And you will certainly have a better ability to make money on whatever you sell than your competitors.
B. Achieving Uniqueness
tions increase the patient compliance?
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
What would be the developing cost?
How to tackle the risks encountered during combination product developmen
The competitive situation we described earlier with Evil Egbert is not all that unusual. Unless you are doing something that no competitor is able to copy, you will have some competition, even if it isn’t particularly good competition. How can you get your profit picture looking like you don’t have any competitors again? The key is finding some way to be unique. Ideally, you want to find a uniqueness that is considered valuable by some of your customers, but even simple strangeness and oddity can count for something – just look at the success of Ben & Jerry’s or the Rainforest Caf?. In a vanilla world, people will pay a little extra for chocolate. Remember, though – if your unique
t?
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
As combination products don't fit into the traditional categories of drugs, medical devices, or biological products, the USFDA is in the process of devel
ess works, and gets you profitable business, your competitors will probably try to copy it, sooner or later.
One key to maintaining the competitive edge that uniqueness brings is to make it very difficult for competitors to copy you. There are several ways to do this. Competitors will fail at copying when one of four things happens:
1. They are unable to copy your uniqueness
2. They choose not to copy your uniqueness
3. They are prevented from copying your uniqueness
4. The competitor copies you weakly because they fail to focus
Let’s look at the keys to maintaining uniqueness in the light of these four factors.
1. Competitors will be unable to copy distinguishing
One key to maintaining the competitive edge that uniqueness brings is to make it very difficult for competitors to copy you. There are several ways to do this. Competitors will fail at copying when one of four things happens:
1. They are unable to copy your uniqueness
2. They choose not to copy your uniqueness
3. They are prevented from copying your uniqueness
4. The competitor copies you weakly because they fail to focus
Let’s look at the keys to maintaining uniqueness in the light of these four factors.
1. Competitors will be unable to copy distinguishing
ping new procedures for reviewing their safety, efficacy and quality.
Professional from academic institutions, pharmaceutical industries, health care indust
Professional from academic institutions, pharmaceutical industries, health care indust
haracteristics that are extremely difficult, or that require skills that cannot easily be acquired. To use this factor, choose distinctions that require know-how that you possess and your competitors do not.
2. To convince a competitor to do anything is extremely difficult. To prevent competitors from choosing to copy your distinction, you may want to choose a distinction that is superficially unattractive. For example, any distinction that increases costs, or violates conventional wisdom about how people make money in your industry might be passed over by your competition because it is “impractical”. I’ve worked with companies who have made millions by targeting the least attracti
2. To convince a competitor to do anything is extremely difficult. To prevent competitors from choosing to copy your distinction, you may want to choose a distinction that is superficially unattractive. For example, any distinction that increases costs, or violates conventional wisdom about how people make money in your industry might be passed over by your competition because it is “impractical”. I’ve worked with companies who have made millions by targeting the least attracti
y and representatives from various regulatory agencies are working out to design the regulatory requirements for manufacture and sale of combination products
e customers in their markets simply because their competitors didn’t want to sit down and figure out why no one wanted those customers.
3. There are only a few ways to actually prevent a competitor from copying you, and most of them require legal and/or government intervention. A good example of this is patent protection, which is certainly a viable method for maintaining uniqueness. Unfortunately, most of these approaches have a finite life span, so you had best be increasing your uniqueness in some other form while you have the protection of the government. If you don’t, you will find that reliance upon legal protection can be a debilitating addiction – and cold turkey withdrawal
3. There are only a few ways to actually prevent a competitor from copying you, and most of them require legal and/or government intervention. A good example of this is patent protection, which is certainly a viable method for maintaining uniqueness. Unfortunately, most of these approaches have a finite life span, so you had best be increasing your uniqueness in some other form while you have the protection of the government. If you don’t, you will find that reliance upon legal protection can be a debilitating addiction – and cold turkey withdrawal
.
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
As there is an increasing trend of the combination products companies manufacturing such products should be able to tackle the problems involved in the de
s often fatal.
4. The focus advantage is unquestionably one of the simplest and easiest tools available to the smaller company. It is particularly useful when you are competing with a much larger company. If you choose to focus on a specific market that is much narrower than your larger competitor, you will likely become the preferred supplier for that niche. The downside of this approach is that you will become less successful outside of your focus area – but you should be able to reap much higher profitability as a result of focusing your efforts on meeting the needs of a specific type of customer. Many smaller companies avoid this approach because they feel it limits their abili
4. The focus advantage is unquestionably one of the simplest and easiest tools available to the smaller company. It is particularly useful when you are competing with a much larger company. If you choose to focus on a specific market that is much narrower than your larger competitor, you will likely become the preferred supplier for that niche. The downside of this approach is that you will become less successful outside of your focus area – but you should be able to reap much higher profitability as a result of focusing your efforts on meeting the needs of a specific type of customer. Many smaller companies avoid this approach because they feel it limits their abili
elopment. They need to be wiser in analyzing the market trends and the regulatory requirements.
Companies that provide selfless information through particip
Companies that provide selfless information through particip
y to grow – but the exact opposite is usually true. In insurance, for example, we have seen companies make excellent profits and achieve superb growth by focusing on a market that is less than 5% of the market their competitors have targeted.
Conclusion
Understanding how uniqueness leads to profit is a great way to differentiate your company and attain higher than average profitability in your business. Too many people treat profit as a simple, black-and-white item that can only be tackled in predictable, copyable ways such as cost cutting. With a little care, you can set your business apart and truly put your company in a position that yields long-term advantage in the marketplace
Conclusion
Understanding how uniqueness leads to profit is a great way to differentiate your company and attain higher than average profitability in your business. Too many people treat profit as a simple, black-and-white item that can only be tackled in predictable, copyable ways such as cost cutting. With a little care, you can set your business apart and truly put your company in a position that yields long-term advantage in the marketplace
tion in industry events and feedback to regulatory authorities would be able to face the challenges and will be successful in developing combination products
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