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4 Economic Principles That Make or Break Independent Pharmacies

4 Economic Principles That Make or Break Independent Pharmacies


December 31, 2020


Inside: Leverage basic economics to make better business decisions for your pharmacy. 

Big economic theories might not seem like they have an impact on your small independent pharmacy. But understanding how the larger market works can actually give you insight into how to run your business.

You don’t have to get a degree in economics to understand how market forces will affect your prices, your products, and how your marketing will appeal to patients. Keep these basic economic principles in mind, and put them into practice to make your pharmacy more profitable and competitive.

1. Opportunity Costs

In Principle: 

Every decision comes with a tradeoff. When a benefit is gained by one choice, another benefit is also lost: the opportunity to benefit from a different choice. Tradeoffs undergird all economics, as they influence every decision a person makes. A compact car will give a buyer great gas mileage, for example, but will cost them the option of four-wheel-drive.

In Practice: 

In your pharmacy, opportunity costs come into play every day when you’re making decisions about your inventory. You may get a good deal on a bulk purchase, but by making that purchase, you lose the storage capacity for a drug that could potentially be more lucrative.

When you’re buying from secondary suppliers, you may get a really great deal, but the tradeoff could be that your purchase is delivered slowly, you receive the wrong products, or you are sent contaminated or counterfeit goods. Or the opportunity cost is the time lost searching for the best deal.

(Buying from a reputable secondary wholesaler like BuyLine will help you minimize those potential tradeoffs, with deep savings on generics, WAC -3.33% brands, no contract, a 99.9 percent accuracy rate, and no additional membership fees.)

Your patients also face opportunity costs when deciding which pharmacy they should visit. If they visit a chain pharmacy, they may have access to more cutting edge technology, but the tradeoff is they don’t get a personal touch.

Try to figure out what opportunity costs patients might incur when visiting your pharmacy and work to counter them. They may have to drive farther to reach your pharmacy, but with medication synchronization, they won’t have to make the drive as often.

2. Competition

In Principle: 

Competition spurs innovation and lowers prices for consumers. If one company isn’t giving people what they want (e.g., a good price), then another company will.

But monopolies give power to a single entity. Because consumers must go through them to get what they need, the entity has total control over the terms. It can set prices to whatever it wants.

Competition is so crucial to economics that monopolies are illegal. It’s just as crucial to your pharmacy business.

In Practice: 

This principle plays out at every level of business, including your pharmacy. Consider the buy side of your business: When you only negotiate with a single wholesaler, you give that wholesaler considerable power over your contract terms and pricing. When you negotiate with several wholesalers, you gain considerable power by making them compete to earn your business.

Many independent pharmacies grant a single wholesaler a monopoly on their business and don’t think twice about it. Based on the principle of competition, that decision guarantees they will not be getting the best deal on their cost of goods.

That’s why it’s essential to choose a group purchasing organization that submits bids to multiple wholesalers, ensuring they compete to win your business. (This is only one of the advantages provided by ProfitGuard, PBA Health’s GPO.)

3. Supply and Demand

In Principle: 

Supply and demand deals with the relationship between the availability of a product and the price of a product. The larger the supply of a product, the less demand there will be for it, so the price will decrease in order to entice consumers to buy. When demand is high for a product, supply will become more limited, and consumers will be willing to pay a higher price for it.

In Practice: 

Mastering supply and demand means keeping your finger on the pulse of what your community wants. Make sure you have trending items in stock so you can make the biggest profits you can while demand is high. Then, when that demand starts to fade, mark down the products to get them off the shelves so you have room to stock the next hot ticket.

At the beginning of the coronavirus pandemic, hand sanitizer was in high demand, which meant your pharmacy could charge full price for the product because patients would grab it no matter what. Now, hand sanitizer is widely available, so you might have to discount it to entice buyers.

Understanding supply and demand at your pharmacy will also help you optimize your inventory storage. Demand fluctuates based on seasons and based on particular patient needs, and the trick is to have the exact amount of inventory to meet the demand at every point. Too much inventory and you tie up cash flow; too little inventory and you may lose a patient. If your inventory control doesn’t account for the fluctuations in demand, you’re not maximizing your business potential.


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4. Risk and Return

In Principle:

When businesses want to grow, they have to take risks. Risks usually come in the form of financial investment. When a business makes a financial investment, there is potential that they will see a big return that will leave them better off than they were before. But there’s also a risk that they could lose some or all of the money they invested. Big risks can lead to big returns, but they can also lead to catastrophic losses.

In Practice: 

Running your pharmacy, you can’t avoid risk entirely. You have to continually invest in new technology and make improvements to keep up with your competition and keep your patients coming back to the pharmacy.

But you can be smart about the risks you take. Don’t make big investments in projects that aren’t likely to bring a big return. Updating your pharmacy appearance might make it look sleek and shiny, but will it help you serve patients more efficiently?

On the other hand, investments like pharmacy robotics could help you fill 30 to 60 percent of your daily volume, freeing up your staff to devote their energy to patients or other products. Or, you could establish a niche service that is in high demand in your community, like point-of-care testing or immunizations.


 

An Independently Owned Organization Serving Independent Pharmacies

PBA Health is dedicated to helping independent pharmacies reach their full potential on the buy side of their business. The member-owned company serves independent pharmacies with group purchasing services, expert contract negotiations, proprietary purchasing tools, distribution services, and more.

An HDA member, PBA Health operates its own NABP-accredited (formerly VAWD) warehouse with more than 6,000 SKUs, including brands, generics, narcotics CII-CV, cold-storage products, and over-the-counter (OTC) products.


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