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Management Consulting for Clinical Research

The Price of Value

“These days man knows the price of everything, and the value of nothing,” so said Oscar Wilde over a hundred years ago (referring to cynics), and so might complain many vendors of software written for the clinical trials industry. The yawning gap in perception between software vendor and research sponsor as to what clinical trials IT should cost is one of the most significant barriers to both widespread adoption and technology innovation.

 

Pricing of software has always been imprecise, in all industries. Software pricing has come under repeated, cyclical pressures as hardware platforms, code size, price of storage media, explosive growth of users, the Internet, connectivity innovations, and business model innovations have all upturned the assumptions of their time about how much software should cost. The starting point of the software pricing dilemma is that reproduction of software (assuming no customization) is for all practical purposes free, thus eliminating the classic basis for product pricing (“cost of goods sold”). So since the dawn of “packaged” or standard software, pricing has been a Wild West frontier.

 

In most markets other than clinical research software, pricing of software has become more normalized because the markets are large (meaning that there are a lot of buyers), the functionality develops to a point of understandable expectations, variability among offerings gets reduced around the mean, and in the end the market determines a typical or expected price point.

 

None of these factors help us in the clinical research market: the market is very small, there are not many buyers, functionality expectations (as distinct from functionality offered) can vary dramatically from buyer to buyer, and variability in pricing for comparable functionality can vary dramatically from vendor to vendor.

 

Pricing variability can be seen in all sectors of the small but highly differentiated clinical research IT market. In some of the niches for enterprise software, pricing can vary literally an order of magnitude depending on the vendor, on the moment in time (Is the vendor having a good year?), on market conditions (Is the vendor trying to capture market share or are they desperate for new business?), and on vendor maturity (Is the vendor naïve about how to stay in business?). Pricing variability is often a direct function of what expectations software vendors have set among their investors or stockholders (expectations of revenue metrics, of recurring cashflow, and of market size). Pricing variability is also rampant among vendors offering their software on a per-study basis or with a high proportion of services attached (such as in the EDC or ePRO markets). Often such bids from competing vendors are nearly indecipherable by customers. And this is where the frustration sets in.

 

The Impact of Pricing Problems

So what’s the problem with high variability in pricing? First there is the manifest confusion about what this “should” cost. With such high variability, how do biopharma customers of these software tools come to understand what is a “correct” or “fair” or “reasonable” price? There is a very real opportunity to overpay for this software. There is also the danger of paying so little that the software community cannot survive to provide what the customer needs. Worst of all, this variability brings attention to itself, and draws attention away from where biopharma customers should be focusing when making vendor selection – on vendor-sponsor fit, on service quality, on technical reliability, on functional suitability. Instead of staying focused on precise and efficient analysis of these latter factors, too often a clinical research software acquisition will get sidetracked by the wild distribution of pricing.

 

This phenomenon is compounded by the increasing involvement and power of contracting/purchasing staff in the selection of research IT software. When only back-end enterprise scale software was being used, mostly the acquisition process (rightly or wrongly) would stay within the biopharma’s IT organization and budget. In today’s world of per-study and service-laden software licensing, clinical IT tool acquisition is often falling under the oversight of those who handle CRO contracts and the hiring of outsourced services. These folks (rightly or wrongly) will almost always let price dominate their decision-making – indeed they would assert it is their corporate function to do so.

 

The most damaging influences of the pricing confusion are many-fold:

 

Rampant cynicism, if not mistrust, of vendor pricing

 

Severe difficulties in projecting IT budgets, operational budgets, and/or trial costs (indeed, clinical development costs overall)

 

A stunting of vendor maturity growth as a by-product of sponsor manipulation

 

Perhaps worst of all, inhibition of software development innovation because of the manifest uncertainty vendors face in predicting their future cashflow.

 

The Vendor Answer: What Price Value?

In the Vendor Valhalla, there is a consummate answer to this dilemma: the price their tools command should equal the value they deliver to the customer. Value-based pricing has been the elusive goal of product and service vendors perhaps since the earliest beginnings of commerce. In some markets, economists would say value-based pricing operates quite efficiently: people buy small cars because the value of transportation to them lies in the efficiency or affordability with which the car moves them from point A to point B versus the alternatives (city bus, walking); people buy luxurious sporty cars because of the value they bring in personal satisfaction or status; people buy minivans because of the value of carrying family and friends in large numbers in relative comfort.

 

Value-based pricing for clinical research IT tools is hard to achieve. Gone (I hope) are the days when vendors sold their tools to biopharma on how many days faster a drug will get to market because of the use of their product. And yet, isn’t it true that switching from paper to EDC can (in theory) accelerate clinical development to the point that literally billions of dollars will be made sooner, and more billions to boot, as a result of faster submission? If this can be traced to the use of an EDC tool, what should the inventor, developer and provider of that tool be paid? If the robustness, ease-of-use, and cleverness of an adverse event tracking and reporting system enables a sponsor to identify post-marketing safety issues faster and more accurately, improving patient safety and fending off a damaging market withdrawal, what should that sponsor have paid for that software?

 

As much as vendors salivate at such “value propositions”, rare indeed are the instances where tools have been rewarded by the hands which used them. It doesn’t happen. And yet, we know the software is worth more than the CD it has been burned onto.

 

A Possible Response

Sponsors have at least two ways to contribute to the resolution of these dilemmas in a positive manner. One is relatively quick and simple, and ultimately limited, but still an advance: sponsors need to somewhat artificially create some normalization of this pricing by developing and applying basic “bid grids” and similar templates, especially when purchasing software through service-based models. This is directly akin to CRO bid processing, logically, and should allow sponsors to make the best use of the experience of their purchasing departments. More than that, it will enable clinical development staff to begin to structure the pricing evaluation component of vendor selection in something closer to an apples-to-apples comparison and help them understand where (vendor) costs come from.

 

But more importantly, sponsors are woefully behind in understanding how much their day-to-day operations truly cost, and the components of that cost, without which they cannot begin to judge what the value is of a tool which replaces, displaces or enhances those components. This is the heart of the problem from the biopharma side of the conundrum, and has always been a hindrance to the improvement of clinical development operations issues of all sorts.

 

Some Truths

Ultimately, there are two fundamental truths in small-market pricing that apply in particular to clinical research software. First of all, the ultimately “correct” price for software must meet two requirements:

It must seem fair to the biopharma sponsor

It must be able to keep the vendor in business.

Obviously, and painfully, to reach these twin goals requires a degree of openness, honesty, financial awareness and sophistication, that is mostly missing in our industry.

At the other end of the continuum from the quantifiable to the qualitative, there is another approach to pricing value which may be, in the short term, the most compelling: the value of necessity. In describing the role that EDC played in processing a huge amount of data from a large number of patients in a pivotal Phase III trial in a highly competitive product market, one sponsor memorably said that while using this vendor was enormously painful in many ways (and presumably not worth what they were paid), the sponsor could not have completed this trial and the subsequent submission any other way. The tool had been essential to meeting the business need.

This is value, in its purest form. If vendors can deliver this kind of benefit without the pain, and if sponsors can learn enough about their costs to understand what the tool did for them financially, the price of value will be clear to all, and willingly paid.

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