Getting your product range right is not easy, yet it is absolutely critical to a pharmacy’s success.
Unlike pricing and stock management – where the pharmacy manager usually has significant amounts of accurate data and analytical tools to guide their decision making – product range optimisation is still an art more than a science, and making an incorrect decision can be disastrous. Consider these examples:
- Following a survey in which customers said they’d like less cluttered stores, Walmart introduced Project Impact in 2008, removing 15% of the SKUs it carried. Sales declined significantly, and it was forced to roll back most of the changes.
- Super Fresh, owned by the grocery retailer A&P, stopped carrying many of its low-selling dry grocery items to allow for an expansion of fresh offerings. However, the eliminated products turned out to be essential to customers; when they couldn’t find them, they took their business elsewhere, and the retailer entered bankruptcy.
We have worked with several pharmacies in the last number of months and the data shows that about 20% of all their stock is obsolete. Most pharmacy managers think that de-listing these products will fix the problem. However, the management of obsolete stock in a pharmacy, like so many product range decisions and strategy shifts, is largely an act of faith. It’s easy to spot the ‘dogs’ in your current stock, of course – sales data will tell you that – but it’s far from obvious what these slow-sellers should be replaced with.
Moreover, there is always the nagging concern that a slow seller you eliminate might be an important product to some of your best customers, prompting them to defect to competitors. As all retailers and pharmacy managers know, picking the best product range is a balancing act; any one change can have a ripple effect.
Plenty of software tools claim to support product range planning by helping retail managers to decide which combination of products will maximise sales. But with very few exceptions, they lack the ability to forecast demand for new products or to estimate how much demand would transfer to other products if a slow-seller were dropped.
The tools do little more than facilitate a manual planning process that relies on the judgment of managers for key inputs. They do nothing to reduce the risk inherent in every product range decision.
To address this deficiency, we, at PharmaSupport, have developed a technique that makes product range planning vastly more scientific. It is rooted in our observation that, most of the time, customers don’t buy products; they buy a bundle of attributes.
Think about the last time you bought a TV. Did you say, “I want TV X”? Or did you think about screen size, resolution, price, LCD versus plasma and brand? Our approach uses sales of existing products to estimate the demand for their various attributes and then uses those estimates to forecast the demand for potential new products. Armed with this data, pharmacies can test their hunches more scientifically.
Our attribute-based approach has a lower margin of error
Using our method still requires some judgment about which attributes are important to consumers, and how these preferences might influence their purchasing decisions if they don’t find their first choice. The steps below can help pharmacy managers to tackle these questions.
- Can we improve your product range by replacing slow-selling products with new ones? What is the likely demand for the potential new items?
- If customers don’t find their ideal product, what is the likelihood that they will substitute another?
- How will sales change if we increase or decrease the number of products we carry?
By focusing on the attributes of products, pharmacy managers can maximise the number of customers who say either “That’s exactly what I want” or “This product may not be exactly what I want but it’s close enough, so I’ll buy it.”
Understanding Which Attributes Matter Most to Customers
Most retailers already think about their products in terms of attributes and can readily identify those that matter in their category. They might include price, brand, size, flavour, form and colour.
We need to understand that customers’ willingness to purchase a product depends greatly on the attribute. Customers probably won’t substitute one very strong brand for another lower quality brand, but they might buy a different size if the requested size is not in stock.
So in building a product range, retailers need to account for the fact that, should customers be unable to find their ideal item, some of them will buy the next-best option and some won’t. In our packet size example, we were interested in how many customers that would shift up by one quality level if their first choice were unavailable and the percentage that would shift down.
We can also figure out how well items you don’t currently carry would sell and how adding them to your product mix would affect overall sales. This is where the science comes in.
In the example below, we have demonstrated the transfer of sales from 3 competing premium skin care ranges in a particular pharmacy assuming the pharmacy will reduce the stock to one range only.
After the reduction in stock was conducted and all the staff in the pharmacy were trained in the products of the existing range, sales increased in the current brand by 51% and stock levels were reduced by a whopping 67%. The return on investment increased significantly, in addition to maximising the range and the use of space in the pharmacy.
This approach will also have other benefits, such as ensuring clarity of products for your staff and providing more incentives for the existing supplier to work closely with your pharmacy, as he/she will see an immediate increase of volume.
This exercise is not as simple as identifying the top 100 revenue-generating SKUs and calling them the ‘product range’. However it is well worth keeping this approach for pharmacies with limited space range as it will increase the use of space and your working capital.
If you want to know more about this topic, please contact Juan Pablo Fravega at 085-765-6110 or jfravega@pharmasupport.ie
ABOUT Juan Pablo Fravega
Juan Pablo Fravega is a Retail Expert and Business Consultant at PharmaSupport. He writes about marketing trends, consumer behaviour and other relevant topics that enable pharmacists to increase sales, serve their customers better, and be better Managers overall. When he finds some spare time he also lectures in Marketing, Supply Chain and Operations Management in IBAT college on their undergraduate and MBA programmes.