Florida National UniversityHSA-6163 Planning and Marketing in Health Services Administration: Assignment Week 5
Vertical Marketing System: Chapters 9 and 10.
Objective: For this assignment, you will describe, Organize and analyze the vertical Marketing
system. The paper will be 3 to 4 pages long.
ASSIGNMENT GUIDELINES (10%):
Students will critically measure the readings from Chapters 9 and 10 in your textbook. This
assignment is planned to help you examine, evaluate, and apply the readings and strategies to
your Marketing skill in your Health Care organization.
You need to read the chapters assigned for week 5 and develop a 3-4 page paper reproducing
your understanding and capability to apply the readings to your Health Care organization and
Marketing. Each paper must be typewritten in 12-point font and double-spaced with standard
margins. Follow APA style 7th edition format when referring to the selected articles and include
a reference page.
EACH PAPER SHOULD INCLUDE THE FOLLOWING:
1. Introduction (25%) Provide a brief synopsis of the vertical marketing system and the
importance of this one to your market in the Health Care Facility.
2. Form of vertical integration (50%)
Refer to your textbook chapter 10, pages 387-388, and choose from there three Forms of Vertical
integration, mention, describe, and cite all the important characteristics present in them:
a. Determinants
b. Product cost saving
C. Transaction coat saving
3. Conclusion (15%)
Briefly summarize your thoughts about the advantages and disadvantages of the Vertical
Marketing system, and provide a possible outcome for the Marketing department. How did these
Chapters influence your opinions about planning and marketing?
Evaluation will be based on how you respond to the above, in particular:
a) The clarity with which you critique the case study;
b) The depth, scope, and organization of your paper; and,
c) Your conclusions, including a description of the impact of these marketing strategies on any
Health Care Setting and the marketing projects.
ASSIGNMENT RUBRICS
Assignments Guidelines
1 Points
10%
Introduction
2.5 Points
25%
Your Interview
6 Points
50%
Conclusion
1.5 Points
15%
Total
11 points
100%
ASSIGNMENT GRADING SYSTEM
Dr. G
A
90% – 100%
B+
85% – 89%
B
80% – 84%
C+
75% – 79%
C
70% – 74%
D
60% – 69%
F
50% – 59% Or less.
Chapter 9
Price
Chapter 9 Learning Objectives
1. Appreciate the many factors that affect pricing
decisions.
2. Recognize the array of alternative pricing strategies
available to health care marketers.
3. Calculate break-even pricing.
4. Learn the positioning value of price.
Introduction
• Price
– The level of monetary reimbursement a firm
demands for its goods or services
– Represents the economic value that the buyer
provides to the producer in exchange for a
product or service
– Price should be established that corresponds to
the level of value that the consumer perceives in
the service being offered.
– Can affect consumer demand and competition
response
Trends in Pricing
• Transparency (regulatory, organizational)
• Consumer response (negotiation, shopping)
Introduction
• Price in health care—alternative approaches
– Cost-based reimbursement
– Fee-for-service
– Diagnostic related groups (DRGs)
– Capitation
– Pay for performance (P4P)
Learning Objective 1
• Establishing the price
– Multistep process
1.
2.
3.
4.
5.
6.
Identify the constraints to the pricing policy.
Determine objectives.
Estimate demand and revenue.
Determine the cost, volume, and profit relationships.
Select a pricing strategy.
Consider the positioning element.
Learning Objective 1
• Identifying constraints
– Demand—basic economics
– Newness in life cycle
• Volume objectives or profit objectives?
– Single vs. multiple-product pricing
• How many products in line?
• Complementary?
Learning Objective 1
• Identifying constraints (cont.)
– Production cost
– Channel length (distribution determines price)
– Market structure
• Monopoly, oligopoly, monopolistic competition, pure
competition
EXHIBIT 9-2 Industry Structure and the Impact on Price
Learning Objective 1
• Pricing objectives
–
–
–
–
–
Profit
Sales
Market share
Image
Stabilization
Learning Objective 1
• Estimating demand and revenue
– Prepare a demand schedule—summary of amounts
of a product that are desired at each price level
– Helps understand consumers’ price sensitivity at
various levels
– Price elasticity—change in demand relative to
price changes
Learning Objective 1
• Cost and volume relationships
– Fixed costs—do not change based on volume
– Variable costs—vary with amount of service
delivered
– Indirect costs—costs that cannot be identified with
a particular customer or unit of the organization
– Total cost—total expense firm bears in delivering
and marketing its service
• Combination of fixed and variable costs and indirect
costs
Learning Objective 2
• Simplest approaches to price setting
– Cost-plus pricing
• Selling price represents total cost of service plus some
additional amount for profit.
• Does not consider the differences between fixed and
variable costs
Learning Objective 2
• Cost/price relationships
– High fixed cost / Total cost = Volume sensitive
– High variable cost / Total cost = Margin sensitive
Learning Objective 2
• Cost and volume relationships (cont.)
– Marginal cost pricing
• Price per additional procedure must equal or exceed the
cost of an additional procedure.
• Useful in attracting large-volume purchasers
– Markup pricing
• P = BR; Price = Service cost
(100 – Markup %) / 100
Learning Objective 2
• Cost and volume relationships (cont.)
– Target pricing
• Sets price to provide a targeted rate of ROI for a
standard level of service delivery
• Common in capital-intensive firms
• Limitation—price is set with no consideration of market
demand.
– Demand-minus pricing
• What the market is willing to pay, and mark backward
• Very marketing-based vs. CFO-based
Learning Objective 2
• Pricing strategies
– Price lining—product lines
• Gives impression of quality differences between
price lines
– Odd pricing—just below whole dollar amounts
• Item budget theory
– One-price vs. flexible pricing
• One-price policy, same price to all customers under
same conditions
• Flexible pricing policy—negotiation, consumer
buying power
Learning Objective 2
• Pricing strategies (cont.)
– Prestige pricing
– Leader pricing
– Bundled pricing
– Reference pricing models (CalPeERS)
– Going rate pricing
Learning Objective 2
• Pricing strategies
– Discounts (cont.)
• Volume
• Functional
• Seasonal
• Allowances
• Centers of excellence contracting
Learning Objective 3
• Break-even analysis
– Company determines break-even point needed
to cover total costs.
– Break-even point = Total fixed cost
Price – Variable cost
– Point of volume where total revenue equals
total cost
Learning Objective 4
• Positioning value of price
– Consider competitive environment and where
product or service is priced (high or low).
– Consider how much focus will be placed on price
in promotion (active or passive).
Summary
• The price an organization establishes has an
economic, perceptual, and positioning value to the
firm.
• Multiple factors affect the pricing decision, such as
demand, life cycle, product line, and channel
structure.
• Organizations can pursue several different pricing
objectives—profit, sales, market share, image, and
stabilization.
Summary (cont.)
• An important consideration in pricing is determining
the amount of sales needed in order to break even.
This figure is based on the total fixed cost, variable
cost, and price charged.
• In addition to break-even pricing, firms can follow a
cost-plus pricing, marginal cost pricing, markup
pricing, target pricing, or demand-minus price-setting
policy.
• In establishing price lines, it is essential to have
noticeable differences in perceived quality for the
distinct lines.
Summary (cont.)
• Odd pricing is based on item budget theory, which
assumes a consumer predetermines the amount to be
spent on an item.
• Prestige pricing is counterintuitive to the economic
logic of a rational buyer. Too high a price, however,
will lead to a decline in demand.
• Bundling, or selling several medical services together
at one set price, is becoming a common strategy in
health care, particularly as buyers turn to reference
pricing.
Summary (cont.)
• There are several ways an organization can reduce the
price for a product. Discounts can be based on
volume, function, seasonality, an allowance, or
centers of excellence contracting.
• Price has an important positioning value depending
on how active or passive a role it plays in the
promotional strategy, and on the level of the price
relative to the competition.
Chapter 10
Distribution
Chapter 10 Learning Objectives
1. Understand the concept of channel structure and the
alternative channels available.
2. Know the varying levels of distribution intensity and
the considerations in implementing each alternative.
3. Understand the concept of vertical marketing
systems and their application in health care.
4. Describe the nature of channel leadership and
conflict in the channel.
5. Recognize the application of retailing in health care
strategy.
Introduction
• Channel of distribution—the path a product
takes as it travels from manufacturer to
consumer
• Key decisions
– How the product should be distributed
– Who within the channel should perform specific
functions
– How much coverage of the market is needed
– How the channel can be controlled
Learning Objective 1
• Alternative channels of distribution
– Direct channel—producer directly to consumer
• Web is changing the nature of direct channels in
health care.
– Indirect channel—intermediaries
• Producer—wholesaler—retailer—consumer
Learning Objective 1
• Functions in the channel—utilities
– Place
– Time (asynchronous vs. synchronous)
– Possession
– Form
TABLE 10-1 Synchronous vs. Asynchronous Time
Utility Trade-offs
Data from Lee H. Schwamm, “Telehealth: Seven Strategies To Successfully Implement Disruptive Technology And Transform
Health Care,” Health Affairs, Vol. 33, no.2 (2014): pp. 200-206.
Learning Objective 1
• Functional shifting
– The movement of different functions between the
producer of a product or service and its
intermediaries or the consumer
– Function must be shifted if an intermediary is
eliminated.
Learning Objective 1
• Channel management
– Degree of distribution required
– Gaining channel cooperation
– Dealing with conflict
• Organization must decide how available the
product will be to customers.
• Are intermediaries necessary?
– If so, then there is potential for conflict.
Learning Objective 2
• Intensity of distribution
– Channel intensity will determine how available the
product is to the ultimate consumer.
– Must consider the consumer’s expenditure of effort
in external search
• Intensive
• Selective
• Exclusive
Learning Objective 2
• Intensive distribution—product available in a
large number of outlets
– Primary care groups
• Multiple satellite facilities, extended hours
• Exclusive distribution—product or service is
offered in a highly restricted number of outlets.
– Highly specialized medical services
• Selective distribution—hybrid
– Has increased in health care
Learning Objective 3
• Vertical marketing systems
– Channels in which intermediaries are integrated so
their functions are performed at the most efficient
place within the channel
– Driven by
• Production cost savings
• Transaction cost savings/improved coordination of
services
• Overcoming market imperfections
• Management and internal factors
• Environmental changes
Learning Objective 3
• Forward vertical integration—operations are
acquired or developed that are closer to the
final buyer.
• Backward integration—acquiring operations
that are closer to production
– Three common forms
• Corporate
• Administered
• Contractual
Learning Objective 3
• Corporate integration
– Combines both the production and distribution of a
product or service under one corporate ownership
• Administered
– Coordination between channel members, but there
is not common ownership.
• Contractual
– Cooperative—agreements between channel
members on the same level
– Franchise—contract that links manufacturing and
distribution
Learning Objective 3
• Evolving channels in health care
– Disintermediation (elimination of the middleman)
such as American Well and MD Doc
– Reintermediation—specialized intermediaries who
efficiently link buyers and sellers (ZocDoc)
Learning Objective 4
• Channel conflict—occurs when a channel
member perceives the attainment of its goals
or effective performance is impeded by
another
– Conflict is vertical or horizontal.
– Areas of conflict are goal, domain, perceptual.
Learning Objective 4
• Channel leadership
– Channel commander—dictates or controls the
activities of the other members of the channel
• Can be manufacturer when its product is very popular
• Can be wholesaler if product is to be distributed to a
large number of manufacturers or retailers
• Can be retailer when it has a strong image or extensive
market coverage
Learning Objective 4
• Channel leadership (cont.)
– Sources of power
• Coercive
• Economic
• Reward
• Referent
• expertise
Learning Objective 5
• Retailing concepts
– Structural dimensions of a true retail market
1. Intermediaries align supply and demand
2. Demand driven by engaged and informed consumers
3. Supply is restructured
Learning Objective 5
• Retail positioning matrix
– Based on the breadth of the retailer’s product line
and the value added
• Four quadrants
• See Figure 10-9
Learning Objective 5
• Retail positioning matrix (cont.)
– Position must be chosen that offers an identity in
the market relative to competitors.
– Five steps
• Strategic direction
• Current positioning
• Competitive positioning
• Alternative evaluation
• Plan development
Learning Objective 5
• Retail mix
– Goods and services
– Distribution of services
– Communication strategies
Learning Objective 5
• The wheel of retailing
– Describes the process of how new retail forms
enter the market and how they evolve over time
– Figure 10-9
• Position 1: Entry—low price, margin, status
• Position 2: Higher prices, margins; broader services
• Position 3: Higher prices, margins; full service
• Position 4: New outlet enters the market
FIGURE 10-11The Wheel of Retailing
Summary
• The channel of distribution is the path a product takes
as it moves from producer to end user, or the path a
patient takes as he or she moves through the health
care system to the appropriate level of care.
• Within the channel of distribution, intermediaries
provide value in the form of utility.
• In establishing the channel of distribution,
organizations must decide the level of intensity of
service delivery.
• In order to control the channel of distribution and
obtain greater efficiencies, organizations can integrate
either forward or backward.
Summary (cont.)
• The growing formation of integrated delivery systems
in health care is a vertical integration strategy.
• In any distribution channel, there is often a single
entity or leader who can dictate or control policies
with its intermediaries.
• There are several sources of power available to any
distribution channel member: economic power,
rewards, referent power, coercion, or expertise.
• The channel in health care is changing with
reintermediation and disintermediation
Summary (cont.)
• Conflict in the channel can occur that is either
horizontal or vertical. Conflict can be either goal
based, domain based, or perceptual.
• Organizations can be positioned perceptually in terms
of the breadth of their product line and the perceived
value-added.
• Health care organizations have a retail mix that
includes their pricing policies, distribution, services,
and communication tactics.
Summary (cont.)
• In service industries, new market entrants tend to start
as low margin, low status. As they mature and grow,
this low-entry position is left open to new retail
forms.
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