You’ve heard the cliché that ‘to make money in business is to buy low and sell high’. There is no clearer truth than that, but within the details of buying, operating and selling is where a person will either succeed or fail. Having the best price with the most efficient operation does not guarantee success. You still have to promote your price. When you’re able to combine pricing and promotion, you’ll gain profitability.
Pricing doesn’t just affect profitability. Pricing drives profitability. Most experts believe price is the ultimate profit driver. It is the most critical component of merchandising with the single greatest affect on profitability. Take the findings of a McKinsey & Co. study that found that small changes in price can lead to big profits. According to the study, a 1 percent increase in price can drive up to an 11 percent improvement in operating profitability. By contrast 1 percent changes in fixed costs, variable costs and volume did not deliver the same magnitude of margin enhancement; they improved profitability by 2.3 percent, 3.3 percent and 7.8 percent, respectively.
Studies such as this illustrate that businesses, like your pharmacy, have a lot of room for profit improvement through better pricing strategies in your front end. The difficult part is working with and implementing pricing analyses and strategies. It’s easier to focus on cutting costs and increasing volume than it is to complete the tasks that involve strategic pricing at the line-item level.
Pricing is a complicated issue, compounded even more so in recent years by unprecedented price pressures, like hyper-competition, increased product selection, $4 generics and loyalty pricing. Retail pharmacies are in the midst of an increasingly complex market climate. The number and complexity of line-item pricing decisions is growing rapidly as community pharmacies, like many others, join the movement from mass-market to customer-centered strategies. For the patient, this ushers in a lot of different pharmacy choices and a seemingly unending array of enticements from all directions—front end coupons, $4 generics, rewards for transferring prescriptions, to name a few.
If you want to build long-term relationships with your patients, you have to make sure they perceive your front products as both accessible and valuable. Pricing alone can’t do that, but it’s an important step, so review your prices regularly—both buy and sell. Monthly reviews are recommended, but if that’s not practical for you, aim for quarterly reviews. Just be sure you’re staying on top of your pricing so you don’t miss out on any prime profit opportunities. Start with these fundamental pricing tactics.
Begin with better buy prices
Don’t just assume you’re getting the best possible buy prices for front end items from your primary wholesaler. Compare the prices available to you from other sources and make your purchasing decisions accordingly. Consider using a secondary wholesaler when your primary wholesaler substitutes a certain product or when you can swap out a certain item for significant savings. If you don’t take the time to review your buy prices, you won’t know what opportunities are out there, and your profits will never reach their full potential. Use the resources available to you to ensure you are purchasing your front end products at the lowest cost of goods available.
The next step: Setting sell prices
It’s not uncommon for pharmacies to downplay the importance of sell pricing strategies in their daily operations. It’s easier to set a price and hope for the best than it is to research effective sell price strategies.
Many of you may already be using a “cost-plus” approach, where you calculate what it costs you to carry and sell an item and add on a margin of profit to produce a sell price. This is a legitimate pricing strategy, but it’s not without its snags: Cost-plus pricing ignores pharmacy image and positioning, and if you overlook any fixed or variable costs at all, your actual profit will consistently fall short of your anticipated profit.
There are many variables to consider from one pharmacy to the next, one market to the next, and one product to the next when creating sell pricing strategies. You have to base your pricing strategies on what’s true for your market, not on hypothetical situations or blanket pricing tactics. Pricing strategies aren’t born from instruction—they’re born from information. The information is out there—you just need to capture it, analyze it and act on it.
Look at your competition
You need to know what your competition is charging for the same front end products. This is difficult at the line-item level, but not impossible. Go to other pharmacies and look around—take some notes or scan the circulars. Go to their websites and check out the sell prices they’re offering online. Get a feel for what customers are paying elsewhere for the same front end products you carry on your shelves.
That doesn’t necessarily mean you should focus on beating your competition on price, however. When you’re up against giants like big box stores, price points can be tough to beat. Without that kind of volume, razor-thin margins aren’t going to get your business to the next level.
But maybe your market isn’t so price-conscious after all? You won’t know unless you investigate or have an expert investigate for you. Do you know what price your best market is willing to pay? You should, if you want to optimize your own pricing. Who knows, maybe your competition is charging more than you had expected? If so, they’re probably charging more because they know the market will pay more. If they’re right, you’re leaving money on the table by charging less, but you’re probably not winning very many new patients for your efforts. It’s certainly worth looking into.
Know your market
This leads to the next level of information you’ll need to formulate an effective sell price strategy: market demographics. How well do you know your market? Do you know the ages, family sizes, and income levels of your biggest market segments? Do you know how much consumers in your area generally spend on pharmaceuticals, health and beauty products, and DME every year? Can you accurately sum up the overall values of the customers in your market, and then use that information to customize a product mix with optimized pricing? This information can play a major role in how you set your front end prices for maximum profitability.
Develop your brand
When you have an effective pharmacy brand identity along with an optimal product mix and pricing strategy, you’ll get the most out of the money you spend on inventory for your front end. A brand identity can prove especially effective if you can’t beat your competition on price. You can still win more customers by creating a better experience and fostering greater loyalty through non-price-based incentives.
Case in point: Brand-name pharmaceutical manufacturers that regularly face intense competition from generics. Typically, brand manufacturers do not respond to market pressure by going down on price. They tackle it another way; they compete through branding. Spending money to promote brand-name superiority has been bringing in big returns for some drug companies for years, despite the price competition they face from cheaper generic alternatives.
Even though the brand name may cost more, some patients will prefer to use it instead of a generic because they’ve used the brand for a long time. They recognize the name and they know it works. Use this same idea and create a unique brand identity for your pharmacy. That way patients will be so familiar and happy with your pharmacy, they won’t want to switch to any other—even if it means that your front end prices are slightly higher than mail order or a chain store.
Executing an effective pricing strategy for your front end has never been more critical. Community pharmacies must be able to respond swiftly and strategically to changes in cost, competition, product selection, and consumer demand in order to foster long-term profitability and a successful brand image. It’s important to think like your patients and to recognize that your prices emit signals about your front end products and your business.
