It is a fundamental fact of business that you cannot stop change. You must keep up with it or be left behind. As the commercial environment changes, business owners will find that some of their sources of revenue will be reduced or lost. This means that, in order to keep providing the quality and scope of services that customers have traditionally received, your pharmacy will need to replace lost sources of revenue and income.

One possibility is to raise prices or charge ancillary fees, forcing customers to cover the lost income. This would be problematic for any services other than the most essential ones, especially during a recessionary period and for pharmacies servicing lower-income communities.

Failing that, community pharmacies will find themselves at a considerable disadvantage when competing with larger chains and with mass-merchandisers that offer an on-premise pharmacy. These larger competitors will be able to offset the reductions in pharmacy income with the sales of goods beyond those offered by smaller community pharmacies (see Managing Your Pharmacy’s Product Portfolio).

This means that, as a community pharmacist, the option you are left with is to grow – to find new sources of sales volume. But there’s more than one direction to grow in.

In Search of Volume

The sales volume of every business can be distinguished by the products they sell and the customers they serve.  As such, there are four sources of volume, depending on whether we rely on existing or new products and whether we sell to existing or new types of customers. 

The most fundamental source of volume, and the one targeted by most of the blogs in this series, is selling more of your existing products to your existing customers. Termed market penetration, this approach to growth is limited by the number of customers you can realistically expect to win and the amount of product they will buy. This is why market share is so hotly pursued: it is the ultimate indicator of success in this area.

Winning the share game requires:

1. higher spending than competitors to make more people aware of what you offer, and/or
2. being able to provide customers with a compelling reason – that cannot be imitated by others – to try your service, and
3. product and service execution that uncompromisingly delivers on the compelling reason customers tried you.

As a rule, one never has 100% market share, since factors like location, special needs and even personal friendships will cause people to shop at different places. In fact, it is believed that the market share leader will typically have no more than a 40–50% share and the top three brands will collectively share 65–80% of the market. Suffice it to say that there are limits to how much volume you can expect to win (hence the importance of margin management – see Cost Reduction: Process and Product Development) and, as a rule, each incremental percentage of market share becomes more expensive to acquire and retain.

An alternative is to source new volume in the sale of existing “products” (i.e., retail services) to new customers. Termed market development, this strategy rests on your ability to make use of your existing facilities and staff to sell to a broader geographic community (increasing your “trading area”) or to get non-customers to think of your existing facilities and staff as a solution to a non-pharmacy problem. This is similar to getting consumers to think of baking soda for non-baking uses: for example, a customer might currently be loyal to a competing pharmacy but might still come to your pharmacy for photo developing, lottery tickets or postal services.

The key to the success of this strategy is your ability to develop the new market without incurring significant new expenses tied to store characteristics or staff training and certification. The reason is simple: customers already have a source of supply and your ability to woo them to your pharmacy requires that you be able to give them something their current supplier cannot – and your ability to do this requires a cost advantage. This strategy assumes that cost advantage can be achieved using your existing staff or facilities without incremental expense.

A third option is product development: getting existing customers to buy a wider range of products from you. This is the reason why many pharmacies originally started selling products like cosmetics and why, today, we see pharmacies selling everything from gift cards to groceries and even insurance products.

Like market development, this strategy requires a cost advantage over the existing suppliers of such services to your customers. However, unlike market development, product development gets its cost advantage through a lower cost of customer acquisition. This is because you are banking on your customers’ loyalty and/or your ability to associate your pharmacy with a set of characteristics that customers desire of all products they buy from you. This is the strategy Fisher-Price used to grow from selling toys to selling a wide range of child-related products ranging from toys to car seats: the FP brand character of durability, safety and ease of use means they don’t need to spend as much as competitors do to endow new products (sold under the FP brand name) with those perceived characteristics.

The final source of volume requires stepping outside the products currently offered and customers currently served. Termed a diversification strategy, its success involves the ability to leverage existing managers or management processes, for example renting space to other retailers or even leasing parking spots. This is not a strategy available to most community pharmacies.

It’s Not About Playing, It’s About Winning

There is no shortage of new products that could be offered or new customers that could be pursued. However, the fact that these options can be done is not a reason to do them. The question is to ask is “Why would someone buy from me instead of their existing supplier?” As you’ll see, choosing a growth direction is about finding a source of cost advantage and then using it to give customers something they cannot find anywhere else.

This entry was posted on Thursday, May 6th, 2010 at 10:00 am and is filed under Your Questions Answered. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.