The strategy of unprofitable leaders in pharmacy

Unusual initiative

In 2007, Publix, which owns a chain of grocery supermarkets, 90% of which have their own pharmacies, announced that it would provide its customers with seven of the most popular antibiotics free of charge. The offer was available to anyone visiting any of the chain’s 684 pharmacies in five U.S. states with a doctor’s prescription, regardless of whether they had health insurance that covered the cost of the drugs. The list of free drugs included antibacterial drugs that are prescribed particularly frequently: amoxicillin, cephalexin, sulfamethoxazole, ciprofloxacin, penicillin, ampicillin and erythromycin. The company did not limit the number of prescriptions that each client is entitled to take away for free, but warned that for each of them it will issue a stock of drugs for no more than 14 days.

Publix was the first major regional network in the United States to offer certain drugs for free. And according to its managers, it was primarily a social project. In 2007, in the state of Florida, where most of the chain’s pharmacies are located, more than 3.6 million people did not have health insurance to cover the cost of prescription drugs. “We want to help the people of our state get affordable health care and we think that providing free medications will be a good start toward that end,” the company said in an official press release. Since high health care costs are indeed a major concern for average Americans, private sector involvement in addressing it has been enthusiastically embraced by many doctors and officials.

However, the initiative launched by Publix also had critics. They noted that since antibiotics are taken in short courses, this program will give people very modest and one-time savings. And the main problem of patients without insurance – the inability to afford drugs that need to be taken continuously – will not be solved.

Notably, Publix has heeded these resonances. In March 2010, it announced the inclusion of the sugar-reducing drug metformin, which is used in the treatment of type 2 diabetes, in the program. In August 2011, the ACE inhibitor lisinopril, used for hypertension, certain heart conditions and certain chronic kidney diseases, was added to the list of free drugs, and in May 2014, amlodipine, a calcium channel blocker prescribed for hypertension and angina pectoris, was added. Any customer in the Publix pharmacy network, with the appropriate prescription, can receive a 90-day supply of the drugs (90 to 180 tablets, depending on the dosage).

The strategy of unprofitable leaders: the rules of the game

Of course, despite the great social significance of the Publix initiative, from the point of view of the company itself, giving away medicines is primarily a spectacular marketing move. And although it became the first major regional network in the United States to offer certain drugs for free, it did not discover anything new. The company merely used a slightly modified, but well-known to marketers, technique called the loss leader strategy. It is used to describe the sale of goods or services at knowingly low prices (equal to or even less than the purchase price) or, as in the case of Publix, their free distribution. It is believed that such measures should encourage customers to buy other products of the company at the usual price, and the cumulative, total income from sales will more than cover the losses incurred by the unprofitable leader.

A loss-leader strategy requires precise math, careful preparation, and basic rules.

• First of all, it is necessary to make sure that the stock of loss-leaders is sufficient to cover customer demand. If the customer simply does not have enough goods, he will leave the pharmacy dissatisfied. As a last resort, when announcing a price reduction, warn customers that the offer is valid as long as the product is available.
• It is better to choose popular products for the role of loss leaders. Only in this case customers will be able to appreciate their unusually low prices and realize that your offer is really profitable.
• In order for the loss-leader strategy to have a long-term effect you need to introduce limits that prevent people from accumulating their stock. This ensures that they will return to your pharmacy. This is exactly what Publix did by limiting the number of free drugs dispensed at a time.
• Unprofitable leaders can occupy the most unattractive areas in terms of merchandising. For example, they can be placed at the far end of the sales floor so that the customer has to walk past other products that bring profit to the pharmacy.
• The larger the company, the more confident it can use the loss-leader strategy. The margin of safety that large retail or pharmacy chains have allows them to cover losses resulting from this strategy, if necessary.

In addition, large retailers, due to their very significant sales volumes, have more leverage over suppliers to get good purchase discounts and lower prices for customers.

Lottery element

The loss-leader strategy is a kind of gamble. No company can ever be completely sure that it will recoup its losses. The main risk here is that customers will only come to the pharmacy for those products that are sold at undervalued prices. The practice of “jumping” from store to store in order to buy up unprofitable leaders is quite common, it is often called cherry picking. When picking such a crop, some people prefer to pick only those fruits that are easy to get, choose the largest and ripest of them and ignore the rest of the berries growing on the tree. Some buyers behave in the same way.

However, to be fair, it should be noted that there are not so many convinced and principled “cherry pickers”. When deciding to sell goods at low prices, you should always remember that such a measure should help to increase sales of other products. Publix appears to have succeeded in doing so, with net income of $2.3 billion in 2017, up 13.1% from 2016.

When done right, unprofitable leads increase overall sales and attract new customers. Another interesting feature of this strategy is that it allows you to win back lost customers. According to surveys, people most often return to a vendor whose services they have long ago abandoned precisely because of favorable offers that simply cannot be resisted.

The strategy of loss leaders also improves the public image of the company. For example, following the example of the American Publix network, a pharmacy will always be able to say that by offering goods at low prices, it takes into account the difficult economic situation in the country, cares about the availability of medicines and reducing the costs of its customers.