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Practice Management

Where Is All Your Pharmacy Income Going?

by Mark Opperman, CVPM
    Computer and money

    The typical small animal veterinary hospital derives 20% to 23% of its income from pharmacy sales. However, this number has decreased over the past few years and probably will continue to decrease. The reason, as you might guess, is Internet pharmacies, which have tripled their revenues in the past 3 years. Pet medications are estimated to be a $3.8 billion market.1 In 2011, PetMed Express, the largest Internet pharmacy, reported its income to be $231.6 million.1 And do you know where that income came from? That’s right: your veterinary practice. Internet pharmacies are not bringing new income into the profession; instead, they are taking income out of your pocket and putting it into theirs.

    Regardless of whether you want to accept it, Internet pharmacies are successful businesses that will continue to grow. Business schools often study successful businesses to determine what competitive advantages they have. In other words, what is one business doing that allows it to be more successful than its competitors? So let’s examine the Internet pharmacy business to see if we can determine what competitive advantages Internet pharmacies have over veterinary practices.

    Competitive Advantages

    Probably the greatest competitive advantage that Internet pharmacies have over veterinary practices is convenience. Clients can get up at 3:00 am, go to their computer, order a product, and have it shipped directly to their home. There is no question that many people like to purchase products on the Internet and enjoy the convenience of having those products shipped directly to them.

    Some people would say that a second competitive advantage is price, and that products purchased on the Internet are cheaper than those purchased from a veterinary practice. While this may be true in some circumstances, normally, it is not the case. When I conduct an on-site consultation at a veterinary practice, I always have this discussion with the team, and team members almost always say that products are cheaper on the Internet. To test this, I ask the team to give me a product. We then go to a computer and look up the price of that product on the Internet. I would say that, nine times out of 10, the practice has the cheaper price. So when Internet pharmacies advertise that they are cheaper, don’t believe them. (If it is true in some instances, there’s an answer for that as well—read on.)

    What other competitive advantages do Internet pharmacies have? They have Ms. Betty White—and she certainly is a force to be reckoned with—and they have a substantial advertising budget that they can use to influence pet owners. In terms of what services they can offer clients, however, they really don’t have much.

    Now let’s look at your side of the equation. What competitive advantages do private veterinary practices have over Internet pharmacies? The first one that comes to mind is…convenience! If a client is standing in your practice, what could be more convenient for him or her than purchasing and receiving a product right then and there? Obviously, this only applies if the client is in your practice. Second, you are a health care professional. You know the patient, you are aware of what medications it is on, and you know whether it would be appropriate for the patient to be on another or a different medication. Nothing beats this knowledge. You must “leverage the white coat.”

    What other competitive advantages do veterinary practices have over Internet pharmacies? Let’s not forget the manufacturer’s guarantee on some products. For example, if a client buys a guaranteed heartworm medication from a veterinary hospital and if the pet contracts heartworm, the manufacturer will pay for the cost of treatment. Will the same guarantee apply if the client buys the heartworm medication from an Internet pharmacy? Not necessarily. Some Internet pharmacies now say that they will guarantee heartworm medication and pay the client if a pet turns up heartworm positive. Will they honor this guarantee? Who knows? But they are smart to try to take this competitive advantage away from you!

    Another competitive advantage that practices have over Internet pharmacies is their highly trained health care team members, who can talk to clients, explain medications, and answer the phone when a client has a question. Who will your clients call at 2:00 am if there is a problem with the medication they ordered over the Internet—the Internet pharmacy? Good luck! No, they will call you or your emergency service.

    The Real Reason

    So if, on analysis, Internet pharmacies really don’t have that much of a competitive advantage over private veterinary practices, why have they been so successful at taking so much revenue out of your pocket and putting it into theirs?

    When I ask this question at meetings and seminars, I get a variety of responses, but I think there is only one real answer: Practices let them! Yes, I think that the veterinary profession has let this happen. As a profession, we have chosen not to be competitive and, therefore, have allowed Internet pharmacies to take revenue away from us.

    Let me see if I can prove this to you. I think most people would agree that the one competitive advantage that Internet pharmacies really have is convenience. That is, they allow clients to purchase medication online, day or night, at any time they wish. Yet how many veterinary practices have a store on their Web site? I don’t have an exact answer, but when I ask this question at meetings and seminars, about one-third of the audience put their hands up. We have just said that the one competitive advantage Internet pharmacies have over veterinary practices is convenience. Then why wouldn’t a practice want to have a store on its Web site, thereby giving clients what they want and keeping revenue coming in? An online store will help you not only maintain your pharmacy revenue but also control your inventory because you won’t have to purchase and stock items that seldom sell. Clients will still purchase those items from you; however, the transaction will be through your Web site.

    What about items that really are cheaper on the Internet? They can be cheaper on your online store, too! If you can set your own price on your Web site, you can price products differently depending on whether you sell them online or in your practice. This is called two-tier pricing, and it allows you to compete with Internet pharmacies when clients are shopping on the Web.

    Let’s Put Internet Pharmacies Out of Business

    Can the veterinary profession put Internet pharmacies out of business by being competitive and fighting for this market share? Well, no, I don’t really think so. However, I do think you can give Internet pharmacies a real run for their money if you do three things:

    1. Have a store on your Web site.
    2. Educate your team about the differences between clients purchasing medications on the Internet versus buying them at your practice or from your Web site.
    3. Educate your clients about these differences as well.

    Some great brochures that can help you educate your clients and team members are commercially available. You can also write up a bulletin for your clients and hold an in-service meeting for all team members to educate your team on this topic.

    If you have a store on your Web site and competitive prices, why should your clients purchase products from an Internet pharmacy? If clients can get the same or a better product from you, shipped directly to their home for the same or a better price, with your endorsement and the manufacturer’s guarantee behind their purchase, it makes no sense for them to shop elsewhere. Then you will have taken away many of the Internet pharmacies’ competitive advantages and will be truly competitive in this market.

    Don’t Roll Over and Play Dead

    Internet pharmacies are not going away; they are here to stay. You can decide whether you want to keep your practice competitive and offer products on the Internet. But if you don’t, your clients may very well find a Web site that does and purchase the products they need there. Once this happens, that Internet pharmacy will continue to solicit your clients and try to take more business away from your practice. I would urge you not to “roll over and play dead.” This is a serious challenge to veterinary practices and their income. You also want to make sure your patients get the proper medication with a valid prescription. Be competitive, establish a store on your Web site, educate your clients, and educate your team members. Don’t give your clients a reason to get their products or medications anywhere else.

    Reference

    1. PetMed Express. 2011annual report. http://investor-relations.petmeds.com/petmeds-annual-report-2011/PetMedExpress2011AnnualReport.pdf.Accessed April 2012.

    didyouknow

    Did you know... According to the Well-Managed Practices Benchmarks 2009 study, clients spend an average of $440/year on medical care for their pets.Read More

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