The common motivation for loyalty management is the drive for a recurring source of revenue, largely through repeat purchase. However, if “more of the same” is your sole motivation, you may be missing out on at least four other sources of revenue enhancement (see Figure 1) and may, in fact, make it harder to secure repeat purchases.

Figure 1

Does Loyalty Beget Loyalty?

A basic assumption of loyalty management is “No one ever switched suppliers for an offer that is only just as good.” Challengers always have to spend more or accept lower prices in order to lure satisfied customers. Thus, the incumbent firm has a de facto cost advantage against challengers and, therefore, the capacity to outspend or under-price challengers. Figure 2 shows the comparative revenue and expense flows facing a challenger.

Figure 2

The only time a competitor will be willing to outspend you is if they feel they have an intrinsically better product and are using promotional activity to generate trial: presumably, the customer tries their product and, realizing it is better than yours, stays with the competitor after the promotion is discontinued. Under any other circumstance, the challenger will hold the sale only for as long as they sustain the price promotion. 

Will your loyalty beget more loyalty? It really depends on whether your product really is better. If not, you are living off legacy demand and are ripe for attack. My advice: use your cost advantage to shore up your quality of product and service, then make sure that customer attention is focused on that point of difference.

Greater Market Share or Greater Share of Wallet?

If you are in a market of relatively fixed size, then the only way you can sell more of your traditional product is by stealing customers from your competition. Often, this triggers price or marketing wars that may enable you to achieve greater sales volume, but at lower and lower margins.

Loyalty management provides another growth vehicle: instead of selling to more customers, you concentrate on selling more things to the customers you already have. This is very much like the growth strategy of “product development” that was discussed in “Deciding A Growth Direction.”

There are two reasons why loyalty managed businesses win share of wallet.

First, it enables them to sell more complete “total solutions” to complex problems, which in turn creates differentiation that also supports their price realization.

Second, the cultivation of a customer requires managing them through three stages of “relationship development”: awareness, trial and adoption. The length of time it takes to move a customer through these three stages is termed “the sales cycle”: the longer the sales cycle, the longer the time that must pass between your initial spending to create awareness and your realization of a return on that spending (adoption). However, since customers who already buy one item from you have already moved through the awareness and trial stage, directing new product introductions to them involves a shorter sales cycle and a lower need to spend money to generate awareness and trial.

However, neither of these outcomes occurs naturally. Customers must be educated to see related products as part of a solution or they may never make the bridge from seeing you as selling a bundle of components to seeing you as someone who can “blend” components (i.e., make suggestions or packages) into a solution.

Growing Revenues or Decreasing Costs?

Loyalty management is not just about selling more. It is also about spending less.  A lot less. In fact, depending upon which study you read, it is estimated that it costs 3 to 8 times as much money to acquire a new customer as it does to retain and service an existing customer!

Part of the reason you spend less is because you are securing the greater share of wallet with a single marketing effort instead of a separate campaign for each product. Thus the cost per dollar of sales is lower.

However, savvy loyalty marketers also realize that their deeper relationship may enable them to re-engineer how they market to their customers. For example, you may be able to stop advertising to them and instead reach them via email or other form of direct response marketing.  Challengers would not be able to identify and reach your loyal customers with the same precision since they do not know who they are. In addition, you might even be able to offer them discounts for pre-paying or reward them for sustained purchasing over time. Consumers would be reluctant to accept such offers from challengers (lacking a relationship) since customers may not feel secure the challenger merits their trust.

Are Your Customers Brand Champions?

Satisfied customers are often said to be your best advertisement or best sales person. Their recommendations are seen as more credible since they are not being paid to endorse your products or services. However, customers can also serve in a more active selling role when they generate referral business. 

The reason this happens is not just because the customer is satisfied. The more comprehensive “solution” generated by your share-of-wallet efforts can give customers content to share with others. Moreover, if you find creative ways to spend some of your lower costs on, say, “random acts of supplier kindness,” you raise the standard that competitors must meet to sustain their own accounts.

Customer Inertia

It is estimated that two thirds of all accounts that switch suppliers do not switch out of attraction to a competing brand. They switch because they are dissatisfied with their existing supplier. The reason for this reluctance to change is that customers are creatures of habit and, lacking significant inducement, it is simply easier for them to stay with existing relationships and behaviours.

This implies that the more involved the relationship, the greater the likelihood of customer inertia. This is why we would have to be very upset with a bank before we’d move accounts – we would have to have new cheques printed, make new direct deposit and direct payment arrangements and so on. Is there a way you can interweave your business into your customers’ lives in the same way?

Realize the Potential

Figure 3 shows the profit impact of a one percent improvement in customer loyalty in comparison to a one percent change in price, cost or volume via customer acquisition. As you can see, the gains are enormous and are highest for service-intensive businesses. However, these gains assume that you are securing the benefits of all five sources of increased performance. The potential is there, but you must actively and aggressively go after them.

Figure 3

For more on customer loyalty:

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.

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.