|
The success of a community pharmacy is often affected by decisions that are made long before actual physical practice is initiated. Numerous researchers and teachers who deal with community pharmacy, and its management, have overworked the phrase that three items are foremost in the proper operation of the pharmacy and those three construct are; FIRST: Location, SECOND: Location and THIRD: Location. While management classes will traditionally, or better yet hopefully, see the humor in these remarks, it is a basis in fact that location is a prime predictor of success, albeit not the sole predictor. As we all know, there are those of us in practice that, given the only pharmacy in heaven or beyond, might mismanage that pharmacy.
It is the objective of this article to examine how to evaluate a prospective location and to apply location variables and information to starting a pharmacy. The data gathered during a location analysis is the database for selecting a marketing mix. The marketing mix of the pharmacy is those strategies used to define our product, price, place and promotion. The demographic and competitive variables that we define or describe in our location's analysis become market targets and market constraints for our overall plans. In this article two concepts will be explored, first, a rational approach to location analysis and secondly an application of location variables to the projection of key operating data.
The location decision should not be looked at as a one-time exercise. Since
the impact of location variables can be immense, they should be revisited over
time. The connection between location variables and the marketing mix may serve
as "bell weathers' of change or suggested change through the life cycle
of our practice or business. Changes should at the least dictate an examination
of our entire marketing mix. Traditionally, the location dynamics come into
play at the inception of the practice and when reviewing a lease or deciding
to buy or build a facility at the existing location. It is held her at the location
dynamics go beyond place decisions and should be consistently examined for their
effect on pharmacy operation and be more persuasive. The marketing mix can be
examined in the context of location variables; the relationship is illustrated
in Figure 1.
In each of these marketing areas location variables are suggested that will shape strategies. The above lists are not exhaustive bur are only used to illustrate briefly the importance of good location data.
In approaching location it is this author's view that one should work from a macro level of the geographic area. That is to ever narrow down our area until we can define a location in terms of a specific site. For example to work form the region to the city and then to a particular geographic space within that city.
The prime factors in considering a location combine consumer demographics, business and allied community trends associated with pharmacy and/or health. The factors we should examine are:
1. Population: An examination of more than just the aggregate number of people in the area should be carried out. Among the important data are: age, imcome, purchasing power, level of education, percent of home ownership, and number of multiple dwellings
a. Important Population Questions:
i. What are the overall population trends?
ii. Are incomes rising or falling relative to inflation?
iii. Income family size static?
iv. Is age increasing?2. Prescription Buying Power: What is the nature of the location as far as ability to generate prescription dollars? What is the availability of third party payment plans, both public and private? What is the nature of the industry and industry covering of prescription drugs?
3. Physician Availability: What is the potential in the area to generate prescriptions? What is the type and number of physician specialties in the area?
4. Competition: Competition today in pharmacy takes the form of more than our traditional independent, chain or hospital outpatient pharmacies. Today we must look at HMO's, mail order, and any other number of non-traditional competitors in the market place
5. Community Trends: It would be wise for the individual starting a pharmacy to check with various civic and commerce groups to determine what are the socioeconomic trends in that area. Is there the ability not only to support a new pharmacy but to sustain that pharmacy over time? What is the percentage or what the trend as far as new housing starts? Are there environmental improvements going on? What are the attitudes toward service?
These groupings of data would form the locational model that a prospective owner might utilize in evaluating locations. As the prospective entrepreneur examines the list of variable groupings he/she should be aware of those be aware of those characteristics of a particular site that are truly unique. In choosing a site that presents some uniqueness in these prime factors one can develop what is referred to in retailing as a differential advantage. This unique characteristic usually is valued by consumers and can result in a competitive edge. It is to this end that we not only collect the data but analyze it to attain the most utility form the prime factors.
Are there more items that we could consider; certainly, but these are a starting point for us to examine. We take these factors and generate for ourselves check lists or a mini self-assessment of the location. We can either rate them on a scale that we design or we can qualitatively describe the situation.
Where do we find out about these factors? The demographic characteristics that we desire are usually readily available from sources such as Chambers of Commerce, United States Department of Commerce, Local Planning and Zoning Commissions, State of Regional Business Development Boards, banks and lending institutions. We can find regional data in publications such as the Survey of Buying Power, the annual publication of Sales and Marketing Management magazine. With regard to the competitive forces at the location we can rely on wholesalers, pharmaceutical manufacturers, pharmaceutical associations, and personal observation to go out and study the site.
Earlier we alluded to starting at the regional or state level and ever narrowing down out spatial consideration. Once we have made our location or area decision we must find a site within the location. The site for our pharmacy will be that place where the physical plant will be situated. In many cases this is the real starting place for the application of specific location analysis. This is true from two perspectives, first this is when we must refine out location data and examine where we will fit; and second, this is the situation where a developer or real estate agent contacts us with an "ideal pharmacy location." In either case, we must take the location model or variable suggested earlier and apply them to the site.
The first step in analyzing the site is a consideration of the nature of the site we which to utilize. Scenario two above results in a site a type of pharmacy being described by the real estate agent. Scenario one requires the entrepreneur to make some decisions, the perspective owner must determine if the pharmacy will be free standing, i.e. the traditional situation with little regard to, or presence of, outlets around or attached to the pharmacy. The complexity of these sites grows from free standing to various planned shopping areas.
The most common we now see in pharmacy is the small neighborhood strip center. The complexity can range, however up to and including the regional shopping mall.
The site dynamics to be considered in either scenario centers on the ability of the site to generate traffic. The pharmacy owner must ask, will I generate traffic for others or will others generate business for me. The ideal situation can only be defined by the prospective owner. However, in general, we should have three C's in place for our site; convenience, complementary neighbors and compatible neighbors. The site should have such dynamics that pharmacy patrons will be drawn to the site and not turned off by the site.
Once we choose the site, or have it chosen for us, the real application work will commence. The pharmacist is now armed with a database relative to his location and must distill and extract information that is germane for his/her decision-making. In order to complete this step, the pharmacist must define the extent to which the site will attract patrons from the total location area. This process is referred to as defining the trading area of the pharmacy or the geographic area from which the pharmacist will draw customers.
Trading areas are usually described as being primary or secondary trading areas. The primary trading area is that area where approximately 50 percent of patrons of the pharmacy reside. The secondary trading area is that area where 90 percent reside. In the past, researchers have considered the primary trading area to be within one mile radius of the pharmacy site with the secondary trading area being 2.5 miles in radius. As we switch from urban to rural sites and as we get into populations where travel to shop and to visit physicians increases these traditional rules of thumb will also increase. Once the trading area has been determined the pharmacist would apply his checklist of those factors he feels less important to the location. These would outline things like population, competition, and those factors mentioned earlier in this article. Once the trading area has been established in special terms the pharmacist can use this data to project market since. Utilizing the data gathered, the pharmacist could for instance project total prescription potential dollars or total pharmacy purchases.
The pharmacist can start using these rules and location on a map his pharmacy and draw circles to define his trading area. Once the pharmacy is operating, the trading area can be better defined using prescription files and patron addresses. The circles or addresses will give the pharmacist a geographic picture from which to draw conclusions about his location.
Demographic and population data can be handles by taking the area and examining either census data from the U.S. Department of Commerce or Community Development Agency data. If the location is an urban area and census tracts are available the tract data can be adapted for the location. In many instances the use of Census Tract Data cannot be utilized. In such a case, the pharmacist would take the map and determine what percentage of the total population fell within his/her trading area.
As and example of the steps in the process we can employ the following information:
At the completion of this process, the prospective owner should be able to project a profile of the average expected patron. The entrepreneur will also have been forced to study the competitive atmosphere of the site. With the demographic and competitive profile in hand the pharmacist can carry out two important applications, first, project prescription and total sale for the site and, second, design market strategies that will appeal to the population that has been described and targeted.
In this review we will only consider the first agenda item and that is projecting sales. The following formulas present a method to generate prescription sales:
These formulas present one method of calculation total potential prescription dollars. In an attempt to generate a picture of the Survey of Buying Power Edition of Sales and Marketing Management presents data on retail sales by store grouping by State, Metropolitan, County, and City areas. The survey also refines population data by city. Using the survey we can calculate total potential pharmacy sales in our trading area:
These two steps would yield the total potential sales and total potential prescription sales in the trading area. The pharmacist must now decide on what is a realistic market penetration that can be achieved. The market penetration becomes the final decision criteria to open or not. The market penetration can be looked at as wither a projected or break-even minimum. These criteria become individualized depending on many economic and market factors, for example, the amount of venture capital available to carry the pharmacy until a desired market penetration or break-even occurs. With these caveats, the pharmacist can now project budgeted sales and a budgeted incomes statement. This process is:
1. Set a level or levels of desired market penetration depending on market and competitive profile generated.
2. Calculate Projected Sales
a. Total Potential Pharmacy Sales in trading area multiplied by Percentage Market Penetration.
b. Total Prescription Sales Potential in Trading Area multiplied Percentage Market Penetration.
3. Generate and Income Statement Using Total Potential Sales as the base for projections.
Use Lily Digest Sales Percentages to move from Total Sales to Net Profit.
Multiply the Lilly Digest percentage for each category on the Income statement
by Total Potential sales to generate a cost of goods sold, gross margin, and
individual expense categories.
4. Examine the Income Statement and make decisions where savings could office and how your situation is typical ort atypical. CDO instance the largest expense category in the majority of pharmacies is salary and wages, therefore if the prospective owner can make adjustments in wither owner/ manager or employee wages significant savings could occur.
5. Make decisions based on good economic and market data.
In conclusion, we have endeavored to in a short space cover the important aspects of location analysis. It was the objective to carry the location exercise to a point beyond merely describing in qualitative terms the location and site. The generation of an income statement and sales data is a realistic application. However, as in most applications of this nature, the pharmacist must observe and tailor or weigh variables to their individual situation.
