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.

Written by Ken Wong

There was a time when a pharmacy was a pharmacy. People needed medicine and they came to a pharmacy to get it.

Then the world changed. Mass merchandisers discovered that pharmacies were not only profitable in their own right, but also could generate traffic that led to other sales. And pharmacies discovered that they too could capitalize on the traffic-generating powers of “healing” to generate sales of items from cosmetics to photo and electronics and everything in between, including a vast array of “wellness” products.

As the boundaries between different types of retailers blurred, pharmacy owners found themselves managing multi-product businesses and choosing between new “business models.”  Would pharmacy dispensing be run as a distinct profit centre doing what it could to make money in its own right? Or would some pharmacy-based profits be sacrificed to generate traffic for, say, health and beauty supplies? Would we even carry non-health-related products like beauty supplies?

In addition, decisions had to be made about the allocation of time, attention and other resources between the different parts of the business. For example:

• How much effort should be spent on vitamins and supplements versus, say, cosmetics or over-the-counter (OTC) products?
• How much assortment and space should be allocated to different products?
• How much space should store newsletters or flyers dedicate to each type of product?
• Which products should be sold where in the store?

Questions like these become especially critical to address when new competition arrives. While there may be a reflex reaction to fight new competitors “tooth and nail” for every part of the business, would it perhaps be more prudent to concede some areas and focus on others?

The Role of Pharmacy

The first question a pharmacy owner should ask is “Are we a pharmacy that carries other products or are we a general merchandise store that also has a pharmacy?”  While this may seem like a strange question (“Of course we are a pharmacy!”), at the heart of the question is an understanding of what drives store traffic – and profitability – for this business and for the competition.

One option is to be a pharmacy that wins customers more because of its location and/or specialized advice and services than because of the price of the drugs it sells. This type of store would likely derive the bulk of its revenue from a small base of highly loyal clients whose needs are primarily health related. These clients probably have a set of health issues specific to a particular demographic characteristic (such as age or ethnicity) which predisposes them to pharmacies with deeper product assortment and higher levels of pharmacy service. While focusing on a narrow customer base might reduce sales volume, the customer need for greater convenience or specialized and personalized attention would allow for higher margins and overall profits

A different option is to be pharmacy that wins customers more because of prices. It may still offer extended services but these would likely be no more extensive than those offered by competitors. The lack of differentiation for this type of store usually means lower margins: maximizing its profitability requires either a large customer base or customers who buy a large array of non-pharmaceutical products along with their prescriptions

The difference between these two extremes is more than just semantic. If service-focused or specialty pharmacy is your main profit generator, then every aspect of your operation – staffing, store layout, assortment, stocking policies, level of service and so on – needs to be set in terms of what is required to support the pharmacy’s operations. Even though non-pharmacy products may be profitable, the key business drivers are those required to offer superior pharmacy, because customers come into the store for specialized prescription needs and, while there, buy non-pharmacy products out of convenience.

By contrast, if your profitability is driven mainly by price-related traffic generation, pharmacy operations need to be supported at a basic level, but then key operational decisions must be made to support what is needed to win non-prescription sales. Spending money to create a superior pharmacy service will create costs that reduce pharmacy margins. Since these costs would need to be recovered in non-pharmacy areas, they can make it difficult to be price-competitive on non-pharmacy products unless the customer base is extremely large

Non-Pharmacy Products

Setting the appropriate approach to managing the various non-pharmacy products will depend upon the role played by the product in defining your short- and long-range strategy. For most retailers, products will fall into one of three groups:

• Share-focused: These products define your business and are seen as essential to your credibility with customers. They may or may not generate big profits directly, but they are key to generating customer traffic. As a rule, this collection of products will have a common focus of low price, best value or product superiority (at premium price): the same characteristic that defines your overall business strategy. You must dominate in these areas, so you are constantly looking to build share.

• Promotion-focused: These are regularly purchased products that are hard to differentiate on quality or service, but customers expect you to carry them. Everyday pricing is important but not critical. However, customers do respond to special offers, so the key is to be opportunistic. Manufacturer promotions, seasonality or perhaps fads in buyer desires would create an opportunity to enhance profitability.

• Cost-focused: These products are staples but are not necessarily purchased on a regular basis. Customer need for these products is highly situational or driven by unusual circumstances such as moving, minor household accidents and the like. As such, promotions do not tend to result in large sales increases and pricing does not need to be overly competitive. Profits will be driven by your ability to reduce your cost of carrying these products.

Try this approach to categorizing products to help you choose a portfolio of products that is consistent with your choice of short- and long-term strategies.

Written by Ken Wong

Nothing impacts on your bottom line more than how you set prices. Not only does it impact on your overall margin and volume directly, but because most people tend to make multiple product purchases in a single trip, your pricing on certain “headline” items can generate spillover sales and profits.

To manage price effectively there are “3 C’s” you need to consider: Costs, Competition and Customers. Surprisingly, many community pharmacies and other small retailers only consider two of these directly when, in fact, their success depends more on the “missing C”.

Cost Issues

It is estimated that over 80% of all firms set prices using a process called “cost plus pricing”. They take the invoice price charged by a supplier, add what they feel they need to cover overhead and profit needs and the sum becomes their price. The rationale for cost plus pricing is that it insures that, in the battle for consumers, businesses are certain to recover all of the costs and profit needs required to stay in business.

However, while the cost-plus  approach sounds simple, knowing the real total costs associated with a product is harder to identify than many people realize. This is because total costs are largely made up of two components. One part is what we pay a supplier for the physical product. This cost is easy to identify, and can be taken right off the supplier invoice. The other portion is comprised of a proportion of overhead and other fixed costs – rent, heat, staff and the like – that we incur in order to have a venue in which to sell that product.

These costs are easy to know in the aggregate since we can read them in our financial statements, The hard part comes when we try to allocate those costs to individual products. The standard approach is to calculate an average percentage of costs that are due to overhead and other fixed costs and add that percentage to the invoice price of each product. For example, if you found that your invoiced cost of goods sold in a month was, say $240,000 and your total overhead costs were, say, $30,000, you would add (30/240=) about 12.5% to the invoice price plus your desired profit margin to arrive at a final selling price.

Indeed, while manufacturers cannot legally set the retail selling price, their recommended pricing usually includes a margin that is believed sufficient to cover overhead and profit needs for an average business. This is why retail margins tend to vary depending on product category.

Because the markups like this reflect an average cost of doing business, the practice of using a standard markup across all products can result in you over- or under-charging relative to your real costs. This is because the amount of overhead that should be charged to a product is not constant: it may have less to do with the selling price and more to do with some other characteristic like physical (bulk) size, turnover rates and whether special equipment or displays are needed.

For example, a fast moving item in a small footprint package which requires no in-store promotion or special equipment, costs you much less to carry than a big bulky item that is infrequently bought and requires special equipment like refrigeration. When you apply an average overhead charge to all products you essentially overcharge on the fast moving item…which usually means it won’t stay fast  moving for very long – especially if your competition is taking turnover rates, footprint and the like into consideration in setting their prices.

The Fallacy of Competition-based Pricing

Some people believe that in adopting competition-based pricing they are outwitting their competition by scooping sales based on the smaller store’s ability to make quick adjustments. While that agility is to be applauded, if your realized price isn’t covering  costs and profit needs then they’re really outwitting themselves.

The problem here is that larger stores almost always have lower costs than smaller stores and so, on the same item, they do not need to charge as much to cover costs and profit needs. There are four reasons for this. First, larger stores tend to receive higher rebates and volume discounts from suppliers. Second, larger stores are often in a better position to negotiate special promotional considerations. Third, larger stores usually have enough volume that they do not require wholesalers or other intermediaries between them and the supplier. Finally, a big part of the big box or large store business model is based on their lower overhead costs (as a percentage of sales).  This was covered in a post on cost reduction.

The bottom line: if you are going to compete against someone bigger than you, you won’t be successful selling the same thing they do.

The Missing C

The missing C in most cases is the customer.  This sounds improbable since prices are supposed to reflect what will attract buyers. But there is more to it than the price of individual items.

When you sell on a product-by-product basis you play right into a large chain store’s hands. Brand X is brand X, no matter where it is sold. Thus the appeal is universal. The goal is to use the feature priced item to build store-wide traffic.

An insightful small retailer can negate that advantage by selling “bundles of products” under a “bundled price”. These bundles should reflect the peculiar shopping habits of the small retailer’s neighborhood. Because chain stores need to run the same promotion everywhere, the more peculiar the bundles  are to a neighborhood, the less able the chain store is to copy them. In addition, selling bundles enables you avoid “cherry picking” customers who only buy the featured item.

Some examples of bundles that you can match with therapeutic categories:

• If you sell a lot of, say, diabetic medications you might want to offer a bundle of mega-vitamins, test strips, supplements, foot care products and diabetic candies.
• For pharmacies near a pediatrics clinic, the “chicken pox” basket – Aveeno colloidal oatmeal for baths, calamine lotion, and Tylenol.
• A “healthy snack food basket” for people with high blood pressure or high cholesterol.
• Seasonal promotions for flu kits

The idea is that you can encourage customers to buy products they might not otherwise try and perhaps encourage them to stock up while the sale is on. Price-wise, the attraction is that you can usually provide a bigger discount on the bundle than you could on any one product.

This practice also enables you to connect your front-of-store and back-of-store operations in a data-driven way, using prescription data to tell you what bundles to offer, If you check your records you might even find that there is a pattern to when certain types of medications are most often purchased and you can time promotions accordingly.

The Bottom Line

Community pharmacies will never win against bigger rivals when selling individual products. The cost and competitive factors work against them. However, if they can shift competition to something that requires local knowledge more than scale, they can attune pricing to customers and shift the game in their favor. Price for the customer and the rest will take care of itself.

We have a winner!