The elusive win/win Is value capture a problem for pharma?
A pig and a chicken agreed to meet for breakfast. The chicken said, We should both contribute something for breakfast. Ill bring the eggs and you bring the bacon. It is a concept at the heart of every deal ever struck. I do something for you, you do something for me. The key question is who wins from this exchange and who loses.
A win/win situation comes about when both the customer and the supplier benefit from the deal, and value is created for both. The win/win situation is the holy grail of long-term customer success, but it can prove elusive for the pharma industry. Other industries struggle with this as well, but is there anything special about pharma that makes it especially difficult?
From other industries we can see common features of the two key components of successful win/wins: value creation and value capture.
Value creation is often the easy half of the equation. There are many ways that any company can seek to add value, either by reducing cost in use for the customer (e.g. fewer faults, faster delivery times, bundled service), by providing value-added services (e.g. training, consultancy) or by raising their value to their own customers (e.g. Intel Inside).
The more difficult step is that of value capture. How can we ensure that we are not simply increasing our costs by providing value to our customers that they are not willing to pay for? If a supplier offers a customer more added-value than the competition but the customer is not willing to reciprocate in terms of price, volume or share then this is a lose-win scenario. As Amstrad chairman Sir Alan Sugar is keen on saying, I can sell 20 notes for a tenner all day.
So, how do successful B2B companies achieve value capture?
1) The supplier makes the total value that they add across products, services and programs explicit and visible to the customer. The supplier can only capture a share of the value perceived by the customer, so they help them to perceive as much as possible: With our inventory management service, your firm will lower its annual inventory costs by $225,000.; By increasing your production output, our machine will enable your firm to increase annual revenues by $475,000.
2) The supplier may explicitly tie the delivery of this value to the reciprocation from the customer via a contract: We will provide these valuable products and services for this price, in exchange for the stated volume of your business.
3) Alternatively the link may be less direct, but nonetheless clear to all. You raised your level of usage to X last year. We have upgraded you to a Gold Service customer.
4) Finally the supplier may capture value by creating value in a way that inherently links the success of the two companies. Often this happens by creating a win/win/win situation for the supplier, the customer and the customers customers: We will invest in branding our microprocessors. This will increase the attractiveness of your computers, and together we will sell more units; We will conduct co-promotions of our brand exclusively in your stores. This will increase share for us, and increase footfall for you.
Some of these approaches (1, 2 and 3) have traditionally posed ethical and legal issues for pharma. However many of the historical objections have related to the fact that the purchasing physician (where value creation most obviously happened) was writing prescriptions (value capture) using somebody elses money. With the emergence of more centralised decisions that are being made by organisations that also hold budget the possibility arises of value creation and value capture with the same customer.
Route 4 is the least problematic solution for pharma. Health economics already provides a good example in this space. If you use our product then you will get better outcomes for your patient, and you will free up beds earlier (and implicitly, the more successful you are the more we will sell). Is it possible for every pharmaco to create win/wins in this way regardless of their products? Only if they can expand the perception of the value that they add beyond the core product and into the less explored areas of service, support and consultancy. How ready is pharma to explore these new frontiers?