Advertising is particularly effective in pharma categories where pricing is shaped by a “leader” and a “follower” brand dynamic, according to a study in the Journal of Advertising Research (JAR).

Abhik Roy and Mary E. Schramm, from Quinnipiac University, discussed this subject in their article The relationship between competitive pricing and direct-to-consumer advertising: How to manage DTC advertising of Rx drugs in an integrated marketing mix strategy.

Their analysis found that direct-to-consumer (DTC) advertising was “effective in influencing demand” in the osteoporosis and depression categories.

Both of these segments featured pricing “leaders” that are proactive, and “followers”, that are generally reactive to any shifts in pricing by the leader brand.

“The prescription-drug brand that spends most on consumer advertising should be the price leader,” the study said.

For the erectile dysfunction and hyperlipidemia categories, however, advertising was “not effective in stimulating demand”, and brands “tended to price independently”.

In reaching its conclusions, the study looked at two brands from each of these segments. Each pairing had seen long periods of direct competition and logged “relatively heavy” levels of DTC adspend.

Sales revenue data from corporate reports and a company focused on pharma pricing, as well as advertising-spend statistics, also featured in the dataset.

The study also coded print ads to test the theory that price “leaders” typically use “informative, market-expanding advertising”, whereas “followers” normally “use brand-specific messages”.

From a quantitative perspective, it revealed that in categories where the “leader–follower” model applied, the price leader spent “considerably more” on direct-to-consumer ads than the “follower”.

In the erectile dysfunction and hyperlipidemia segments, by contrast, the gap in the two brands’ spending was much closer, with the lower-spending company still recording around 90% of its competitor’s outlay.

Another insight reflected the fact that as “substitutability” between brands is increasing, a “leader-follower” model is likely to emerge. When brands are “very close substitutes”, however, independent pricing is more probable.

When it came to print ads, the osteoporosis and depression categories sectors matched the description of pricing “leaders” using ad strategies that focused on expanding category demand.

By contrast, in categories where there existed a “brand-dominant creative strategy for both brands”, the pricing decisions tended to be less synchronised.

“Each company in these markets (advertisements available on request) aggressively attempted to develop brand equity and gain market share through advertising, and pricing was independent in these markets,” the study said.

Sourced from Journal of Advertising Research; additional content by WARC staff