Pricing- Get it Right While Marketing in the Right Direction

This article is intended as a reference article for the marketing of professional services to assist all pharmacists (owners and individual practitioners) to succeed in a new paradigm of pharmacy with its traditional core business of dispensing plus free advice, with the advice component being developed to paid professional services (core expansion).
Pharmacists are highly skilled people quite capable of improving their professional activities for a satisfactory profit return.
All that is required is a bit of self belief and collegiality between the different levels of pharmacists

Many entrepreneurs hope for success by offering low prices.
World-class entrepreneurs succeed by setting higher prices.

In a survey of 23 hundred-million-dollar and five billion-dollar entrepreneurs, it was found that 50 percent of these world-class entrepreneurs succeeded with higher prices by offering more value and knowing how to sell that value.
An additional 25 percent excelled in merchandising—they used the high-low pricing strategy (or high-free in industries such as the Internet and pharmacy) where they priced low on a few items to attract consumers and priced high on others to earn an attractive profit.
So if your strategy is to succeed by pricing low, please think again, because this has been the basis for the sale of pharmacy professional services for as long as I can remember – and it has never worked!
The individual pharmacist has never been valued properly – only the pharmacy has been valued – yet it derives its value directly from the input of pharmacists!
Current thoughts about reducing pharmacist presence in community pharmacy will prove to be disastrous.
What is required is a long-term major investment in pharmacist skill sets in primary health care and aged health care, for at least a period of 10 years and more.
Government can assist in this transformation.

Let us face it.
Pharmacists individually are woeful when it comes to marketing, with few real success stories.
For this reason marketing has always been a delegated function with individual control being sacrificed and the profession being welded to a supply-side mentality because the people delegated to are dependent on growth through the sale of merchandise.
Marketing of services in pharmacy is generally positioned as free or low price adding value to the product, with the tied merchandise being the apex of a marketing focus.

Pricing is the heart of a business. It affects everything you do and is affected by everything you do. Economists talk of supply and demand as key factors behind pricing—successful entrepreneurs manipulate demand by making their products more desirable.

The right price should fall between your cost and the value you offer to customers.
Within this range, your prices should be closer to the value of what you’re selling.
So to price high, add value, then learn to sell value.
And if you are selling professional services then centre that value in pharmacists!

The following six steps will help you determine the right price for your product or service:

1. Understand Your Patients’ Unmet Needs and the Value You Offer

Your pricing potential is related to the value added for your customers, and their willingness and ability to pay. Products with more features and benefits can be priced higher. For example, a luxury brand vehicle is priced higher than an economy compact car, and a hamburger at a gourmet fast-casual restaurant costs more than one at a fast-food chain.

To understand your target segment and their willingness to pay, first analyse the type of patient you’re targeting.
As an analogy in the supply-side world, corporate customers don’t generally buy from small, unproven businesses even when those companies offer lower prices because they want vendor stability and strength.
But corporations do buy from ventures that have value-adding technologies, and they’ll pay accordingly.

Similarly, high-end patients need high-level benefits and will pay more for those benefits. So focus on the value and benefits you offer, and price your products and services accordingly. Patients need to perceive the benefits of what you’re selling—the higher the perceived benefit (all other things being equal), the more you can charge.

2. Evaluate Your Competitive Strengths and Weaknesses

Understand the relative value you add compared with that of your competitors by comparing your product to theirs. Understand that even if you’ve added more value, you may not be able to charge more for very long, because your competitors may copy your product. For instance, the aged care market is rife with poor examples of service provision, allowing the margin on dispensing to cover the costs and margins for services.
As a result, the marketers who emerged with say, a no charge for a Webster pack are now locked in to a decision that virtually kills the entire market in aged care. 

The stage of your industry also affects your pricing. In an emerging industry, where customers such as nursing homes are forming new relationships, you need to be flexible to determine the right price and the best product-market combination.
Nurse practitioners are one of the more recent emergent competitors and have the capacity to disrupt pharmacy service provision to a considerable extent (see Nurse practitioners ‘fill a gap’ in aged care in this edition of i2P)

In mature service sectors, relationships between your competitors and your potential patients are already set. As the new entrant, you’ll need to find the segment that will switch providers and pay more for the added satisfaction you offer.

Also consider your competitors’ resources and potential response. If you’re competing against giants, a frontal assault with lower prices may only cause failure. So consider entering via the side door and, say, focusing on high-income patients with higher prices.
In a review of your whole of pharmacy marketing mix you may find that you are irrevocably bound to the seniors’ market.
Perhaps it is time to look at other demographics such as the “unconditional” baby market where there is no price limit for that excellent professional offering that you may have packaged in a marketing format that communicates.
Differentiate yourself to gain an edge—and you may be able to charge more.

3. Choose Your Strategy, Then Link Your Advantage With Patient Needs

To determine your strategy, focus on your key differentiating factor—your strategy should reinforce this unique value to keep your patients loyal and willing to pay more due to the unique benefits you offer. 
Note that the price you set is your price – not a PBS government price or a market group supply-side price. It must be your price even if other agencies such as insurance companies and government departments make a contribution towards.
And here is the “rub”.
Beware of managed care organisations (even in the form of health funds) for they will seek to control the market and reduce your profit margin.
Don’t let history repeat itself!

When determining your strategy, seek a long-term advantage where you can defend your differentiation. If you can’t, others may enter the market and erode your edge, prices and profitability. For example, Sam Walton built Walmart’s base in rural America, a base which had been impregnable. He then used this strong base to expand to other areas. Other big-box retailers tried to enter the same rural markets, but they haven’t been as successful.

Here are a few strategies you can choose from when determining your prices:

Price based on value. Many entrepreneurs start with costs to determine pricing, but if customers value your product more than that of your competitors, they may pay more. Companies that add high value can have high gross margins in excess of 55 percent. In order to charge higher prices, however, you have to know how to sell the value you’re offering. Every professional practice business plan generally claims to offer great service to justify higher prices. Unfortunately, this is easier said than done because many entrepreneurs don’t know how to sell value, including pharmacist entrepreneurs, and investors (those people who will lend money to you to fund your establishment and expansion) don’t know whether you can truly sell value.
If you set out to sell against GP offerings you may trap yourself into a low value professional practice.

If you’re able to sell value, however, your gross margins can be higher.
Investors will evaluate your pricing and value by checking your gross margin. High-value practices most often have high gross margins.
Although Microsoft’s image has been through highs and lows, its gross margin is still 77 percent.

Price based on perception. Lower prices won’t always mean higher volume. Sometimes a low price can create doubt about your value. Customers may believe “you get what you pay for.”
This has been the major stumbling block for pharmacists and their inability to market valued professional services and it also reflects on public trust perceptions.
Until they have experienced a professional service from a pharmacist, they will not be prepared to pay for it.
This even extends to where a patient may refuse to enter an enclosed interview room because they have never experienced it before and therefore do not “trust” it.
However, once delivered, there is a high level of patient satisfaction and there is a willingness to revisit.
What is currently missing is the skill of patient engagement and this is an ability to slow a patient down with appropriate words and proven technique, long enough to deliver a message.
If you succeed, then you may move on to sell a service.
This is the reason for investing in quality pharmacists who know their job and come equipped with engaging personalities.
The bible for these pharmacists is Dale Carnegie’s “How to win friends and influence people” and it should take pride of place on the reference book shelf.
As critical mass builds from experience and messages communicated in individual pharmacy marketing programs, public acceptance will become almost automatic.

Price with the trend. Trends affect pricing in many ways. For instance, new technologies may offer more benefits than existing ones and provide high margins. One such trend may prove to be patient biometrics that can be provided very cheaply (using near-infrared or similar technologies) but still with a good margin of profit.
This technology will eventually disrupt traditional pathology laboratories unless they adapt their business model.

As the trend ages and competition increases, gross margins decline. This will require updated or value-added services to generate profits.
In a commercial sense, this is one reason why car and soap companies keep introducing “new and improved” cars and soaps on a regular basis.

Know how to raise or lower prices. Raise prices when you offer, and can sell, more value; when your own costs have increased; or when you see higher demand and have the flexibility to do so.
In some businesses, this can be daily or weekly, but the health services market generally looks for stability for personal budgeting reasons.
However, it is totally reliant on patient perceptions and if they continue to see value they will pay.
Abrupt changes without any notice are often met with resistance.
So if your practice doesn’t change its prices frequently, make sure your patients know ahead of time when a price increase is coming and explain the factors to show that you’re reasonable.
Be sure to also check whether competitors are raising or dropping their prices.

Use the high-low strategy to attract customers. Many pharmacies in their product sales area sell some products at a lower price and promote these lower prices to attract customers—this practice is relatively common.
If you adopt this pricing policy ensure all staff are trained to sell the high margin service, otherwise it will self destruct through not being able to fund its own expansion.
Few pharmacies have a strategy in place to convert a customer to a patient.
It’s true! After all these years pharmacies have not yet realised they are a patient destination point and have devalued their environment to become a “knock-off” for a supermarket.
If you do nothing else in the marketing area, planning a process of conversion to patients will set yourself on an expansion of all things professional.

Price lower to dominate your market only if you have a long-term cost advantage.  A vertically integrated business model may provide additional financial benefits and control. Being long-term it may be possible to operate with a lower margin but a higher return on a scale of economies.
For example, the product Medschecks may be able to be offered to other health professionals and their patients.
A system of patient referrals between other health practitioners may allow for patient referrals from these sources and a new source of pharmacy patients.

Know that it’s easier to lower prices than to raise them. 
This is more evident in the commercial product area.
Some of the most successful computer makers and other high-tech manufacturers have introduced their fantastic new product at a high price, then lowered prices as competitors copied them. Then they introduce a newer or upgraded product at a high price.
This method can be applied to professional service pricing.

Add services to get a higher margin
Professional services may be able to be packaged with products or even other health providers’ services. These types of composites are only limited by your imagination.e.g a weight loss service can be packaged with a local gym.

Above everything is make the service price your price – and don’t rely on government subsidisation or medical fund reimbursement. If your service has value the patient will pay and if enough of them pay, government and other payers will compete to subsidise the cost.

4. Evaluate Your Costs, and Keep Your Break-Even Low

After value, cost is the second most important factor behind pricing. Ideally, your price and your costs should make your cash flow positive. A negative cash flow is very difficult to finance—only about 0.05 percent of entrepreneurs will get venture capital to offset this negative cash flow, and most of them usually involve electronic products development.

At the start, it’s very unlikely that your costs will be lower than those of your established competitors. So charging lower prices based on lower costs is usually a large-pharmacy strategy, unless you have a new, better technology. But, again, charging less for better new technologies may give the wrong message about your value and quality. Know your costs so you know your floor. If your price is below this floor, you’ll lose money.

Your costs depend on a number of factors, including your quality and volume. It’s easier to have lower costs and greater efficiency when you deal in larger quantities. Costs can include:

For products, direct costs of materials, labor and production overhead; and the indirect costs of sales, marketing, operations, administration and financing.

For services the direct costs of continuing education and knowledge acquisition and the indirect costs of sales, marketing, administration and financing.

Variable costs that vary with volume, and fixed costs that don’t vary with short-term sales.

At the start, keep most of your costs variable, and adjust them to the actual level of sales.
At all times maintain your own brand with any associated brands being positioned subservient to your own.
If you lose control of your brand you lose control of both cost and selling price.
This is still a major failure of pharmacy marketing never learning from experience.

5. Adjust Your Prices Based on Margins, Volume and Cash Flow

Should you price higher, lower or the same as your competitors? If you price higher, you’ll need to be able to sell value. If you price lower, you’ll need to be more cost-efficient, which can be difficult for new practitioners. If you price the same, you’ll need to differentiate yourself elsewhere to attract patients.

You’ll need to understand the link between the prices you charge and the volume you get as well as the impact on your gross margins. Gross margins vary from pharmacy to pharmacy, and the principles apply equally to products and services. They’re usually highest in emerging innovations, but which can be quickly copied (with price reductions necessary over time).
First into a particular market segment is given a time advantage only before the rest of the market catches up and eventually commoditises it.

When a product becomes a commodity, many businesses have limited pricing power because they have no differentiation.
As Scott McNealy, the former CEO of Sun Microsystems, once pointed out, without being able to differentiate themselves in the market, they can’t differentially price, and consequently, lack market power and the ability to profit. 
This statement is particularly apt for pharmacy at this moment in time.

You should monitor all facets of your business to know whether you’re staying on track and whether your price policies are being following by your staff.
And here we are thinking of two types of business – the pharmacy with defined clinical spaces as the first type, but practitioner companies being the second type to help fill those clinical spaces.
So business comments apply to both formats.

Focus on the big picture, but monitor the details, especially cash flow. Check costs regularly. Check competitors’ prices. Check value. Understand the impact on your margins. Most importantly, connect your strategy to your goals, resources, ability and endurance: 

Your goals. Your pricing should be a part of your overall strategy and goals. This means that if your business is a high-end business, your prices should be at the high end and so should the rest of your operation. If, on the other hand, you want volume, then you need to know how to compete in the large segments of your industry. If you want to succeed in a niche market, know the market’s needs, and price your products and services accordingly. The key is to be consistent throughout your business. For instance, don’t price low and have high overhead, or price high and have poor quality.

Your resources. If you’re growing with your own resources, price for cash flow. If you’re expecting to grow with venture capital, focus on growth and dominance in your emerging industry and price accordingly. Unless you’re an exceptional high growth company, you’ll probably need to become cash-flow positive quickly if you want to survive and succeed. Understand the connection between prices, sales and cash flow. Also, how much capital do you have relative to your direct competitors? Is it enough to win a price war? If not, don’t get into one. Learn how to sell value.

The two strongest skills of the world-class entrepreneurs are sales/marketing and accounting.
A professional services practice requires a higher degree of personal skill set to differentiate it from competitors.
It is also harder to sell a service as distinct from a physical product because a service is intangible – it cannot be touched or felt.
Marketing of professional services thus requires communication packages that drastically improves the senses of feel and touch. Know the limits of your expertise.
Where does your expertise lie?
If you’re like Steve Jobs of Apple fame and can develop insanely great products and know how to promote them, you may want to consider pricing high.
Then hire someone who knows numbers.
But if you’re like the majority of us, you should learn numbers to control your costs, then learn how to sell for added value or margins, or get a partner who can. 

6. Repeat Until You Get It Right

The fact is, not many entrepreneurs get it right on the first try.
There are numerous examples of taking years to get the right mix of price and strategy.

At i2P we think that at the current stage of pharmacy thinking this will be another 10 years to a reasonable level of maturity.
So you shouldn’t make too many long-term commitments, especially for space or other inputs, before you’ve found the mix of price and strategy that works for you.

The worst thing you can do is try to sell high-cost products but not understand how to sell value at those higher prices. Learn accounting to know your costs, and learn sales to sell value.
Understanding and developing your own value is a prerequisite to owning an independent practice and will take determination, patience and failure on a regular basis.
Don’t even think of giving up!

Knowing the basics will help your business model strategy succeed, and for this reason I will give marketing guru Seth Godin, the last word:

Organizing for growth

Maybe it’s (finally) working. Maybe demand is up, opportunities keep presenting themselves and people want to work with you.

So why are you so stressed out?
It might be because different organizational choices lead to different paths for growth.

Consider a house painter. His business has always been okay, but thanks to his skill and a local building boom, jobs keep showing up.
The traditional method: He lays out the money for paint, he does the work, he sends a bill, and soon, he gets paid.

The good news is that as a freelancer, he’s super flexible and can withstand tough times. But in this environment, all sorts of trouble hits.
First, there’s a cash flow issue.
New jobs mean more need for paint and materials, but he has to lay out his own cash to pay for it.
Second, new jobs mean more work, but he’s the best (and the cheapest) employee, so he ends up working way more hours. No cash, no time, no joy.

An alternative is for the painter to create a scalable system. He could require a down payment on every job, an amount calculated to cover all of his cash costs.
Second, he could spend the time to build a pool of journeyman painters, a Rolodex of talent ready when he needs it. In this scenario, the painter becomes a foreman, not a painter any longer.

Or, consider one step beyond that, in which the painter hires several foremen, each responsible for his own Rolodex. Now, the painter is a CEO, a salesperson, the architect of a brand, an organization and its growth. But that still involves a lot of risk as he scales.

The last structure I’ll point out is the idea that the painter could refine his system and instead of dealing with homeowners, he could find partners, and license them the system.
The system might include his brand name, his sales approach, a computerized, data-driven direct marketing program and most of all, a rule book that lets people who don’t have his initiative enter this business.
By charging every partner who joins an upfront fee (this is how franchises work) as well as a share of their income, he can grow from state to state, building a nationwide painting behemoth.

There’s no right answer.
Not everyone should run a national painting franchise business.
The key insight is to feel the pain that an organizational choice leads to and fix that instead of merely chasing demand and embracing each opportunity (no matter how juicy) as it comes along.

The key things to focus on, I think, are:
* Cash flow

* Demand enhancement

* Increasing the ability to keep your promises by investing in a pipeline of talent

* And most of all, reminding yourself why you’re doing this in the first place. 

Leave a Reply

Your email address will not be published. Required fields are marked *