Many western companies design their business models based on high profit margins. It pays very well to be differentiated and pursue vertical markets. Most horizontal markets are commoditized and a strategy to dominate within it is not always seen as a smart move by analysts. Increasingly firms try to innovate and differentiate in order to carve a niche where they can make hefty margins.
That is very good if your business is domiciled in the saturated Western Europe and U.S markets. There is growth inertia in these two markets with their ultra-competitions and intense regulations. Especially in the pharmaceutical industry, there seems to be no way to expect huge growth in these mature economies.
So what do you do? You have to expand out of Europe and U.S. to Africa, Latin America and Asia. They are the future. They have the population with enormous growth potentials. Despite the downturn in the global economy, they remain promising, especially Asia and Latin America.
Having worked in Lagos (Nigeria) as a banker and traveled to many Africa nations, the high margin structure will not always work in Africa, especially in the pharmaceutical industry. Many are still very poor; yet, they have the same needs as those in the developed world. From entertainment to drugs, they want to enjoy the western products. They want the new cars for their bad roads; they want the best drugs to manage diabetes; the new video games to relax; and so on. Any sense of high cost, people will abandon the product. It is very common to see people die slowly because they cannot afford drugs for treatable diseases.
Arguably, these drugs and cars are available in many parts of Africa. But the problem is that only few can afford them. With no insurance scheme to finance healthcare delivery, patients must pay themselves. What worked in Boston will not work in Botswana because the patient in Boston is being helped by the insurance firm while the one in southern Africa must pay cash. That is the major difference in marketing drugs between U.S and Africa.
Another example is in the telecommunication industry. Cellular handsets are very expensive in Africa when compared to the U.S. Understandably, a simple reason is lack of competition since not many firms have gotten into the markets. Another is the obvious fact that none of those gadgets are made in Africa. So, there are associated transportation and handling costs in selling them in Africa.
Nonetheless, the truth is that by not using value based model, many MNCs are undermining their potentials in developing, emerging or transitional economies like Africa and Asia. You have to offer what the customers can afford and do away with the cost based strategy. In the U.S, you can ask for any price; in Africa, you need sales volume, and lower price makes it happen.
For pharma industry, they have to rethink their strategies. It is time they cut down the prices of their drugs. Drug prices are patient problems, unlike in U.S where it is the insurance firms’ (for those that have, anyway). Many more people can give you sales volume and you will make more profits than sticking to your present pricing model and serving only less than 5% of the African market.
If you focus on pushing volume at good prices, more customers will come in. That alone will help you stay profitable. And they will be better off themselves by using your great products. Drugs, video games, etc must not be overly expensive in Asia and Africa compared to U.S and Western Europe.
Africans are extremely price sensitive because people do not have a lot of disposable income. This means that a very expensive product is not really a product. Simply, it will not work. The continent is a place where people complain of poor education, comparing their schools with the likes of Stanford University and Harvard University, even when they know they cannot pay the more than $50,000 per year required to attend the schools. So, they know the best possible value in the market. And they expect you to deliver value, even when they are not open to pay for the full value.
That puts entrepreneurs in challenging positions. My recommendation is always to follow the P&G model. Deliver the best possible value per smallest possible unit of measure. In that I mean, instead of selling a bag of Ariel detergent of poor quality, sell a high quality Ariel in sachets. The quality remains the same even though the size drops, making it affordable for families. That model can work in many industries including electronics where you unbundle product designs so that products come with optional accessories, making sure that the core product is affordable. (Many on LinkedIn had noted that Cowbell was also efficient in using sachet packaging in its competition in the diary sector, especially against Peak Milk.)
You cannot design without thinking how your customers can afford to pay for the products. Indomie Noodle is another good case study: they offer many entry choices in the market, making it easier for anyone to engage at the level of its purchasing capacity. You need to learn from Indomie as you design your pricing strategy.