Pharmaceutical manufacturers and pharmacies must improve sales, marketing and pricing strategies if they want to profit from over-the-counter (OTC) products. As part of its recent OTC Mystery Shopping Study, the global strategy consultancy Simon-Kucher & Partners, bought test products from pharmacies across Europe. In 72% of cases, prices of various painkillers, on and behind the counter, are not clearly visible to customers.
The findings are sobering for customers, manufacturers and pharmacies alike. As a sales channel for over-the-counter (OTC) drugs, pharmacies are unique in various ways. Price savings are rarely communicated, and pharmacists seldom ask customers how much they are willing to spend. As a result, low-price products have little chance of selling – but top brands are also endangered in price-sensitive customer segments. “Pharmacies’ discount policies and sales competition harbour long-term profit risks for manufacturers,” states Clemens Oberhammer, partner at Simon-Kucher.
Price savings rarely visible – strain on low-price products
Prices are seldom mentioned when pharmacists advise customers. Test buyers in the study each requested two drugs. Most pharmacists asked for more information about symptoms but only one-in-10 asked how much the customer was willing to pay.
If the customer wants to look around the pharmacy and compare prices before asking the pharmacist for a recommendation, a problem can arise: the prices of many products are not clearly displayed, or the customer has to turn the package over to see the price. However, variances were found between products and countries. In the UK, a higher proportion of painkillers show prices clearly when compared with price visibility for vitamins and minerals. However in France, Germany and Spain, the reverse is true.
With regard to purchase recommendations, the differences disappear. Top brands are recommended first in all of the countries studied. On average, less than one-fifth of pharmacists recommend a low-price drug before a leading brand.
“The lack of price transparency and pharmacists’ focus on recommending top brands pose considerable challenges to manufacturers of low-price OTC products,” reports Wolfgang Mitschke, director at Simon-Kucher. But even transparent prices are not necessarily an advantage for low-price products.
Online retail differential
According to price research in Germany’s online retail sector, mail-order pharmacies apply such large discounts to leading brands that products can end up costing less than the low-price alternatives. “Low-price suppliers and top brands all lose out,” says Mitschke, who led the study.
Manufacturers of leading brands therefore face certain risks. When testers asked for a cheaper alternative, 66% of pharmacists on average suggested a cheaper brand instead of a smaller pack size of the top brand, with the highest frequency in Italy and Germany. In some cases the price difference was considerable.
Pharmacies’ hazardous discount policy – long-term risk for manufacturers
OTC market liberalisation is widening the price gap between individual pharmacies. According to the study, many pharmacies offer large discounts on the manufacturer’s price. In the UK and Germany, a leading painkiller (standard pack size) was sold for up to 35% below the recommended retail price. The prices were closer together in France and Spain.
Discounts offered by online pharmacies are in many cases even larger. “These discounts not only put pressure on the market price level but also reduce the profit margins of pharmacies and manufacturers,” warns pricing expert Oberhammer. The incentive to pharmacies of selling particular products is weakening. In the long term, discount wars will have a damaging impact on both margin image and customers’ quality perception. Manufacturers, therefore, need to rethink their sales channels and discount structures if they want to avoid damaging the positions of brands and prices.