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how products are priced?

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  • Mar 20th, 2015 12:20 pm
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Deal Expert
Dec 4, 2010
19536 posts
2260 upvotes
Quarantine Bubble

how products are priced?

Is it mere theory or is it common sense and sound logic that a product is priced according to how much research and development goes into it? Apple for instance makes a generous profit for their products but they also spend a lot in research and development. Their head engineer makes millions to design their products and that goes beyond just jony Ives. Look at pharma, they charge an arm and leg for new drugs. So if that theory holds true why doesn't a product keep going down in price when it has been reproduced for a number of years? Off the top of my head, cars. In its entire life cycle the price does not fluctuate much only when they introduce a new redesign and they want to jetison the old.

So how much does RnD factor into the price of a product?
5 replies
Member
Jan 19, 2008
498 posts
332 upvotes
Products are price on what people are willing to pay. No point in reducing the price on something if people are willing to pay a higher price.
Member
Mar 5, 2013
497 posts
118 upvotes
Ottawa
Supercooled wrote: Look at pharma, they charge an arm and leg for new drugs. So if that theory holds true why doesn't a product keep going down in price when it has been reproduced for a number of years? Off the top of my head, cars. In its entire life cycle the price does not fluctuate much only when they introduce a new redesign and they want to jetison the old.
So how much does RnD factor into the price of a product?
That pharma spend a lot on R&D is the reason behind why they have access to 20-year patents, but it's a big fat lie according to some critics. Most of the research is done in universities and non-profit medical centers (often paid by Government) and once it's known a certain drug could have potential, they'll partner with a drug company who then proceeds to conduct double blind studies to see if it's effective. Effective is the keyword here, as all they have to prove is that's it's better than a placebo, not compared to an already available, cheaper, drug on the market. In truth for the US anyway, the percentage of revenues going towards R&D are along the lines of 15%, while 30% to 40% goes towards advertising and "doctor training", i.e. conferences where doctors are paid to attend to hear about the latest products. The rest go toward administrative, manufacturing, and profit margins.

Once the 20 year patent is up, generic companies are allowed to start manufacturing the drugs and that's when prices do down, but then the drug company will make a minor modification to their best-selling drug, change the name, and enjoy another 20 year patent.
Jr. Member
Mar 17, 2015
145 posts
10 upvotes
Toronto, ON
Check out an article on this very subject:
http://www.forbes.com/sites/matthewherp ... new-drugs/

Really depends on business sector, and the thing is in the case of drugs; once made they are the epitome of "assembly line -style" profits, expensive drugs are especially lucrative, they make insane amounts and charge insane dollars once their out. The R&D costs might be high as a initial figure, but overall i bet you, in a course of a few months they've payed down anything they fronted up and are purely making profits especially in our pill popping societies.

Overall R&D probably as much cost as if you were to give someone a commission for a sale at a store = not much.
Deal Expert
Jun 30, 2006
21132 posts
9788 upvotes
Toronto
Manic1! wrote: Products are price on what people are willing to pay. No point in reducing the price on something if people are willing to pay a higher price.
+1. It's all based on supply and demand. If the demand is their the price remains the same or may even increase. You are correct that price of the product goes down after a number of years in terms of production costs and economies of scale but the profit for the company increases.
Deal Fanatic
Sep 16, 2004
9779 posts
2050 upvotes
Toronto
Usually the costs of Production is calculated and then a percentage markup to cater for profits.

In the Canadian market, some prices are pretty high because of little choice/competition.

Prices may therefore be in line with what folks will pay and what will cover all expenses and yeild a fair return.

Pharmaceutical Industry is rewarded for their research and development via patents for a number of years.

In those years major profits are there for the taking as they bascially have monopoly.

Companies like Apple can benefit immensely from government funded projects that the private companies are able to capitalize on.

The touch screen for instance.

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