Community pharmacies are at a crossroads.

On one hand, these should be prosperous times. The seeming epidemic rise in chronic diseases coupled with the maturation of post-war baby boomers should be creating unheard-of levels of demand for pharmaceuticals. Moreover, the recent closure of a major chain-store pharmacy means there will soon be a large group of unaffiliated customers up for grabs.

However, these are also some very problematic times. There’s more competition for customers due to the arrival of new competitors (especially from the US) and the continued blurring of retail boundaries by giant retailers like big-box stores, grocery chains and online businesses. Worse yet, the need for more aggressive marketing to fend off that competition, coupled with recent changes to provincial regulations on drug pricing and rebate policies, has already created a new set of margin issues.

If that is not enough, all of this comes at a time when the demographics of most community pharmacies means many owners are weighing options for succession planning. And as they search for replacements, they find chains and mass merchandisers are heavily courting young pharmacists in order to expand their number of store locations.

What is the road ahead for community pharmacies? Can they not only survive but thrive in this “new normal”? I don’t think you can generalize, but I do think there are some basic issues every community pharmacy needs to consider in mapping out that future.

The Anatomy of Profitability

The most important thing for community pharmacies to remember is that it all boils down to profit and your insights as to what drives that profit. Here are some that we have noted in the past:

• You cannot beat the “big guys” on price. Prices and costs go hand in hand: you cannot have the lowest prices unless you also have the lowest costs. Community pharmacies will never be able to match the low costs of chains and mass-merchandise pharmacies. In addition, chains and mass merchandisers can utilize the pharmacy as a “loss leader” or traffic builder for non-drug products.
• You will have to be price competitive. This is not a contradiction of the preceding point. “Price competitive” does not mean matching the lowest price. It does mean an acceptance that while customers want something better than “adequate quality,” they may not need, want, or be able to afford all the bells and whistles. Cutting prices while still giving those bells and whistles may be great for the buyer, but it will destroy profits in the future

The rank order of profit variables in terms of impact on profitability is:

1. price
2. cost
3. volume

Cost and volume may switch position for a pharma firm, where so much of the cost is fixed R&D cost. However, the notion that price has the greatest impact on profitability is not a matter of conjecture or even research. It is a simple consequence of how accountants calculate income: price impacts on the top line of your P&L. Cost and volume impacts have to be less, unless you are already bankrupt!

Here’s the average for North American business over the last decade: a 1% decrease in price reduces profitability by just over 11%, while the counterbalancing numbers for cost and volume are 7.8% and 3.4%. That is, a 1% decrease in costs improves profits by 7.8% and a 1% increase in sales volume via customer acquisition is 3.4%. This means that every 1% price cut requires a 1.34% reduction in costs or a 3.4% increase in volume just to keep profits at their “pre-price reduction” level.

From the Mathematical to the Managerial

These ratios drive home the problem facing any price-cutting business that isn’t the lowest-cost competitor. If cost reduction is used to finance price cuts, the result for retailers is almost always a reduction in service due to large percentage of costs tied to staffing. Since it is hard to sustain prices in the face of falling quality, that reduction in staffing (and thus service) tends to create further price pressures.

Worse yet, because being competitively priced is not the same as being lowest-priced, the shopper most attracted to chains and mass-merchandiser pharmacies (i.e., the price shopper) is unlikely to be moved by the price discount. This makes it almost impossible for the price cut to generate an incremental volume (recall, 3.4% for every 1% less price) required to recover the lost profitability. The only people getting the discount are the customers you already have.

Regardless, community pharmacies will find it hard to avoid price cuts. Even loyal customers will switch allegiance if the price gap between the community pharmacy and the chain/mass pharmacy widens too far. As such, community pharmacies often do not fully control the price they charge.

But the forecast for community pharmacies gets worse. Community pharmacies have traditionally battled against the low-price tactics of chains and mass merchandisers by offering their clients superior accessibility, proximity and customer service. However, we have seen considerable improvement in the capacities of the chains and mass merchandisers, as shown by the bidding wars to locate in medical arts buildings and the variety of prescription-filling related services being offered via internet and mobile communications. Bottom line: it isn’t enough to be a good, well run operation that excels at the basics any more. You must find a point of difference.

What to Do

Which would you rather have: deep penetration of a narrow segment or shallow penetration of a broad segment? Historically, opinion on this question is mixed. There are some who believe in shallow-broad because it spreads risk and provides a platform for adding new products and services.

While that may be true, my own belief is that there is more risk in becoming a mediocre supplier to many instead of a superior supplier to a few. No one pays more to receive mediocrity, and mediocrity is the common result when you take the limited resources of most community pharmacies and spread them over a wide market.

The key is focus. But don’t limit your focus to your choice of advertising medium or advertising copy. Instead, let your focus dictate everything you do, including which products to discount. While it may seem odd to discount products that your customers are likely to buy anyway, it is precisely that characteristic that makes them the perfect products to feature. Your target customer will respond to that discount on “something they always need” (don’t we all?), and that opens the door to do more for them.

Final Advice

My final advice is that community pharmacies need to stop thinking of themselves as community pharmacies. Survival will require that you sell more than pharmaceuticals, and so customers must see you that way. Instead, think of who you have to win, who you would like to win and who you will take but won’t chase. Design your store around the “must win” customer and orient all major promotions (price and otherwise) to them.

Your goal is not to be their drugstore but rather the store they go to for all their health needs – especially those tied to their chronic connection. We want them thinking, “If anyone will have what I need, it’s you.”

As for the “would like to win,” ask yourself, “Why?” If it is because they would give greater volume and thereby serve to reduce fixed costs per sale, then it becomes a paper-and-pencil test to see how far costs would fall if you hit your target. If that is the case, then considering finding private-label or generic products to promote. Or work with suppliers on occasional manufactured sponsored programs for a one-time price promotion (just remember to make it one time). On the other hand, if the volume of such buyers is small, then focus on hard-to-find merchandise and compensate for the slow turnover by raising your margin.

As for the third group… don’t chase them. Take their money if they are in your store but do not pursue them. They are a distraction and nothing more.

It’s a been a great three years, folks. Thanks to Teva for their focus on the CPs and for always looking for ways to add value for them. Thanks too for the confidence to let me say what I say without censure.

Be focused… stay disciplined… and execute the margin-sucking maggots! Good hunting!

Written by Ken Wong

As we wind down this series I thought I’d provide a retrospective on the 27 preceding blog posts: what’s still true, what’s changed and, in our next and final post, a look ahead at what I suspect we’ll see in the pharmacy business.

The Winning Performers

One of the best parts of writing this blog is that it gave me a motivation and opportunity to meet and talk with community pharmacists across the country. While most of those discussions were focused on identifying the biggest marketing problems facing community pharmacies, there were some noteworthy traits among the higher-performing community pharmacies. These themes were covered in dedicated blogs and mentioned in others.

Trait 1: They know what “value” really means

The most dominant common characteristic in winning performers was found without exception: The owner understands the primacy of the customer in articulating what value means and formulating a plan to provide it. This does not mean they always give into the customer’s desires or blindly buy into the notion that “the customer is always right,” nor even that they have some collectively exhaustive list of customer needs that they are built around.

Rather, they service that primacy by the attention they pay to their positioning and target market, both of which they can discuss with a high degree of specificity. They understand that positioning statements are not statements of aspirations, nor do they represent some abstract concept of what a pharmacy should be. Rather, in keeping with the primacy of the customer, they start with their so-called target market: those types of consumers they feel inhabit their local community and around which they can customize their service.

Once the target market is identified, they formulate their positioning in terms a kind of customer experience they believe their customer wants, whether that be extensive service, fast service (note: it’s hard to be extensive and fast) or some special set of needs. That positioning then becomes the starting point in making almost every significant decision, whether strategic or tactical. They understand that their positioning creates customer expectations and, in doing so, provides the reason their loyal customers keep coming back. As such, nearly everything can be evaluated in terms of its consistency with a pharmacy’s positioning.

For example, it is rare that any community pharmacy will find itself with lower costs than national chains. Therefore, trying to be the lowest-priced store is not advised. Rather, community pharmacies are encouraged to reflect the character of local neighbourhood, catering their marketing to its peculiar nature (see blog posts 9, 10, 14 and 22). By that token, stores in neighbourhoods dominated by university students should not be identical – in product mix, pricing, store layout, even background music – to stores located near seniors’ homes or in medical arts buildings. In contrast, all stores within a national chain will tend to be similar, and therein lies the community pharmacist’s window of opportunity: while chains standardize, community pharmacies localize.

Given the importance of positioning, it shouldn’t be surprising that we dedicated our first three blogs to helping readers define their positioning and noted in many of the subsequent blogs that selecting from alternative ways of performing marketing tasks – service quality, store layouts, product assortment, etc. – depended upon the pharmacy’s positioning and target market. To further assist in that task, we dedicated blog posts 18–21 to understanding the distinctive needs and attitudes of millennials, seniors, women, and men. Check these out if you’d like to do a quick audit of your positioning and alignment with it.

Trait 2: They put service first

 A second common characteristic of higher-performing pharmacies is the realization that while positioning starts with the owner/pharmacist, it remains an abstract concept void of impact on performance unless it is manifest in the actions of staff. Almost universally, these pharmacists noted that their number one criterion in hiring decisions is “a service attitude.” As one pharmacist noted “I can train how to do the job but not the desire to do it well.”

Once they assemble a staff with a “natural predisposition toward customer service,” the winning pharmacies go to great lengths to ensure that that energy is directed into the right kinds of actions. There are any number of devices that can be used to that end. Regular meetings and training provide initial orientation to the positioning. Equally important, that orientation is constantly reinforced by devices like informal reminders and motivational signage. One pharmacy had an ongoing competition in which points were awarded for certain behaviours; in another, staff wore badges inviting customers to engage with them. If this is an area of current interest, you may want to review our earlier blogs on the in-store experience and customer service.

Trait 3: They build relationships

The higher-performing pharmacies have “rich” communications programs with their customers. When I say “rich” I do not mean they spend an exorbitant amount of time and money on marketing or advertising (although some do). Rather, they are systematic in how they approach their spending and spend to achieve deep relationships with a concentrated market rather than diluting their message over a broad and diverse market. It is for this reason that they also demonstrate the hallmark characteristics of businesses that excel at so-called “loyalty management” (see blog posts 12 and 13).

These are not the types of operations who fund community teams purely out of charity, nor are they the type to expect a single ad, promotion or story to bring about a massive onslaught of business. Instead, these firms make a systematic assault on their market and often have specific performance expectations tied to past experiences with their market and the media in question. They are the consummate “project planners.”

While they may not develop a formal campaign plan, upon questioning, they could all recite the 6 M’s behind a particular communications piece, and I was impressed by the number who developed campaign objectives around stages of the adoption process (see Awareness–Trial–Adoption in blog posts 15, 23, 24, 25 and 26).

A Final Note on “Rocket Science”

As you can see from the above, success does not require rocket science, it requires discipline: the discipline to think things through before acting and the discipline to stick to that plan. We have a name for the kind of marketing that doesn’t require such discipline: Luck. Unfortunately, luck will be a rare commodity in the coming years. We’ll see why in our next – and final – blog post.

Written by Ken Wong

Despite the economic uncertainty of the last three years, I know conclusively that there has been at least one constant that, as the saying goes, you could take to the bank: I, and others like me, have money to spend and an increasing need to spend it on health care.

Actually, let me add another constant to that: No one seems to really want to take my money to their bank.

The Business of Health Care

There can be no doubt that the emergence of big-box players (e.g., Walmart) and national chains (e.g., Shoppers Drug Mart) has altered the landscape for those in business of health care retailing. Nor can there be any doubt that the often stock-market-driven need for these firms to grow has caused a blurring of the boundaries between health care and other products (such as clothes, food and beauty products). What’s more, health care in general and prescription-filling in particular are often focused on building traffic for other merchandise departments rather than being stand-alone businesses. It’s easier to have low prices when you don’t have to make direct profit to be considered a positive profit contributor.

It is smart marketing for these big players. The key success factor becomes finding a way to offer basic services at the lowest possible price. This does not mean the service in these outlets is of lower quality. For the mass market that has basic health care needs tied to the occasional prescription purchase, this service is perfectly adequate.

Consequently, a community pharmacy has a difficult time winning mass, low-priced business unless it is lucky enough to benefit from a geographic monopoly – for example, being the only store in a trading area or being the pharmacy connected to a medical arts building. However, even geographic monopolies are getting harder to find, as national chains have strategies for securing medical building locations and entire real estate departments looking for territories with sales potential.

Enter Me, My Friends and My Family

Fortunately, there remains some very profitable business that is still available. Whether or not you can win that business depends on two key perspectives.

The first key perspective is that no one really wants to buy drugs or pharmaceutical advice, and superior service is not why we go to pharmacies. There are three reasons people go to pharmacies: to continue living, to get better and to maintain a good quality of life.

We need to ensure that people never forget that. This doesn’t mean massive ad campaigns with scare tactics suggesting people will die if they don’t deal with us. Nor does it necessarily mean boring “public service” education ads. In fact, it may not require much traditional advertising at all.

Rather, in this era of scarce family physicians and a national “epidemic” of chronic diseases, community pharmacies need to assert themselves as the front line in the health care system. And please don’t tell me it isn’t going to happen until there is compensation to do so: compensation should lie in the stream of business you generate – provided, of course, you are selling to the right customer.

This brings me to the second key perspective: You cannot make much money providing high levels of front-line service to a customer who makes infrequent purchases. While they will appreciate the service, unless you can find a way of billing directly for the service, the infrequent buyer will not have enough chances to reward you with their patronage.

By contrast, the frequent user of your pharmacy is making regular and frequent purchases. You can charge them less per prescription for that front-line service and recover the cost of your service faster. Better still, for progressive diseases, the frequent user will tend to expand the range of drugs they buy over time. Even better still, the frequent user of a service within a family will usually dictate the behavior of the entire family: When you win the business of someone with a chronic ailment you win both their everyday business and that of the occasional user who might otherwise go to a mass merchandiser.

In sum, you don’t need to be the front line of health care for everyone (at least not without compensation), but it makes enormous sense for you to do so for a certain class of customer.

Opportunists or Strategists

It seems to me that most pharmacists are, in the language of business, opportunists and not strategists. They take whoever has a pharmaceutical need and then they try to sell them everything they can. By contrast, a strategist would start with a much more compelling question: Who is my best customer and what do they really need?

If pharmacists asked that question they’d be less focused on groceries and cosmetics and more focused on the health needs of the fifty-plus-year-old. That is the demographic who either suffer from chronic diseases or are worried enough about things like diabetes, blood pressure and other heart conditions that their doctors have them on a preventative strategy. In addition, the extreme end of that segment are prime candidates for supplements and the latest in “medical jewelry.”

Back to Basics

If you want that frequent buyer, you need to earn their business. As noted above, that means going beyond selling drugs to recognizing and servicing the reasons they want those drugs in the first place.

This doesn’t mean that pharmacies should stop providing – nor that buyers don’t appreciate – services like ordering from home, daily dose bags for pills and briefings on new drugs. But anyone can do that and, in fact, machines can do it faster and cheaper than humans can. This means we take all the training and experience of a pharmacist and we use it to compete against a machine. Not smart. And not profitable.

We need to realize that there are several other services that serve buyers’ real needs. Lifestyle advice, education, monitoring, billing and reminder services are just the tip of the iceberg. We need to expand the role of pharmacists as health care professionals and to accept that some of those services may not be tied to the dispensing of medicines. In fact, many of those services may not be provided or even desired while in the store.

The technology is there to do it. The business case is there to do it. And suppliers of prescription and OTC products would love to help someone do it. So, please… won’t someone take my money?

Written by Ken Wong