Establish your front-end pricing strategy
Business and Operations
Set prices competitively without sacrificing revenue
In brief:
- Before setting prices, define your customers.
- Competitive pricing doesn’t mean offering the lowest prices.
- Know which products are more price sensitive to than others, and adjust prices frequently.
An effective pricing strategy is an important tool in maximizing revenues and profits and winning the competition for pharmacy customers. But contrary to what many independent owners think, independent pharmacies don’t have to mark their front-end prices to be the lowest in the market.
Pricing competitively ≠ pricing low
“The answer is not, in most cases, to discount or slash prices,” said Sean Grudzinski, product research and analysis manager with Hamacher Resource Group (HRG), specialists in consumer health care at retail.
“Before you make a pricing decision, you need to know what your customer is looking for,” said Donna Boulieu, a senior product and pricing analyst with HRG. Knowing your customers is the first step to understanding:
- The goods and services they want
- Their price sensitivities
- Who your competitors are
For example, just because a pharmacy is located in an affluent suburban area doesn’t mean it can enjoy much higher margins on its front-end products. “They are more attuned to value pricing than most customers,” Grudzinski said. And a pharmacy in an urban area that relies on foot traffic isn’t competing with pharmacies across town.
Boulieu said, “A customer who shops at Walmart probably isn’t the customer who will shop at an independent pharmacy.”
“You’re not going to out-Walmart Walmart at their game,” Grudzinski said. A retail giant’s costs on front-end items, such as paper products, will be lower than an independent can negotiate.
However, he said, the most important customer to the independent pharmacy is the one who is buying prescriptions. Offer products, services and prices that will keep those customers shopping at your pharmacy. “Don’t give them a reason to go somewhere else,” Grudzinski said.
Pricing products correctly is tied directly to how you want to position your pharmacy in the community.
“Your price point needs to match your strategy.”
– Sean Grudzinski, Product Research and Analysis Manager, Hamacher Resource Group
Part of that strategy is deciding whether you want to be aggressively priced, moderately priced, or viewed as a premium or luxury store.
Align with your brand
Once you determine the type of pharmacy you want to have then you can determine your pricing strategy—aggressively priced, moderately priced, or premium priced—to ensure that everything about your store, from your product mix to your marketing to your fixtures, reflects that brand.
How important is price? How low should you go?
“You don’t have to be the lowest-priced retail pharmacy in your market area,” Grudzinski said. Usually, if a pharmacy sets its prices within 5% to 10% of the competition, it can still make plenty of sales — at better margins. This is better than setting prices so low that you must sell a high volume to make up the difference.
Also, consumers don’t shop by price alone. An independent can compete well by offering unique products that customers won’t find in big-box stores or discount chains. “That sets the tone for the pricing on that product,” Boulieu said.
“If you carry the same vitamin and supplement line, then you’re competing on price,” Grudzinski said. Instead, a pharmacy can compete by offering distinctive, higher-quality products and services.
While 60% of shoppers are concerned with value, only 20% are price conscious, he explained. (This obviously means that 80% are not price conscious.)
For a shopper, value is the total benefit minus the cost, so part of that value equation is the customer service and other benefits that customers receive from the overall experience in your store.
By offering a single, high-quality, private-label brand that the pharmacist recommends in the front end, pharmacies can offer customers great value while selling products at a 50% to 60% margin.1 If a pharmacy offers multiple generic options, however, it is taking sales away from its preferred private label.
According to Boulieu, a pharmacy needs to go head to head with its main competition on only 1% to 2% of high-profile products, such as purchases the customer will buy repeatedly in large quantities, like pain relievers or glucose test strips.
On other products most customers are less price sensitive. A customer looking for relief from poison ivy, for example, has a sense of urgency and cares less about the cost.
Update prices
To set the best pricing strategy, pharmacy owners need to know the break-even and profit point on all products. Armed with that information, owners can set price targets and test the bottom-line impact of raising prices on some products. By raising prices, margins and penny profits increase. The question is the impact on units sold and overall profitability. If the number of units sold is unchanged or only slightly reduced, raising prices may make sense.
Rather than resisting price changes, Grudzinski recommends that independent pharmacies change prices periodically in small amounts. That way, customers become accustomed to occasional incremental changes and don’t suffer sticker shock when a pharmacy makes rare but major price increases.
“Incorporate change into your business model,” he advises. “Don’t be afraid to try something new and commit to it.”
Monitor the top-selling items in each front-end category weekly, Boulieu said. Also, notice what you never have to order because it isn’t selling. You may be overpriced. When you adjust prices, monitor the impact.
Most important: focus on value and relationships
Focus on the value you provide as an independent pharmacy. “Competing on price alone is not a good strategy for the long term,” Boulieu advised.
“Don’t make your relationship with the customer be about price,” Grudzinski said. “That’s what mass retailers do.” Independent pharmacy has survived and prospered by focusing on service, relationships and innovation — not prices alone.