I’m at the age where a physical is recommended every two years. It is a good thing that I have a doctor I can trust. I’ve known him for a decade. He has learned patience and listening while demonstrating intellectual and emotional intelligence. He doesn’t sugar-coat exam results and he doesn’t try to sell unnecessary treatment(s); it’s a business approach I respect.
It intrigued me greatly when, on my visit for a biennial physical, a large sign was posted on the office door and around the office. It was addressed to Big Pharma sales reps and the gist of the message was that sales reps would no longer be seen by physicians and staff except during an appointed time from 4 p.m. to 5 p.m. on select days of the week. Furthermore, sales reps should expect that their visits would be confined to new medications and supporting research. All other extraneous activities were no longer a part of the seller-physician relationship. These were discouraged and potentially damaging to future commerce.
I couldn’t let this go as I am always interested in B2B events in North American channels. Post the end of my personal business, I inquired about the signage and felt the happenings a portent for the pending changes in PHCP distribution.
No better place to sell
Early in my career, I had the chance to take a sales position with a growing Southeastern-based pharmaceutical distributor. The company recruited from a handful of Mid-Atlantic and Southern universities and, for whatever reason, it was willing to hire me as a sales representative. It seemed of little concern to the company that I was a liberal arts major; it was confident in its training and told glowing success stories of its sellers and their lifestyles.
Something about the position and the cultural fit didn’t seem right, however, and I turned down the offer in lieu of work as a manufacturers rep serving PHCP wholesalers. Many of my peers and more experienced advisers, when hearing of my decision, denounced my 20-something logic. “Pharmaceutical sales is the place to be,” they told me. “The reps get great training, the money is great, and the medical industry has few visible limits.”
To their credit, my peers were correct and, outside of sales positions at IBM and Xerox, there were no higher-paid, better benefitted and better trained reps than those in the pharmaceutical industry. I must have been out of my mind to turn down the job.
Therefore, it was with great interest that I listened to my physician recount the demise of one of the best and most respected sales positions in B2B channels.
Rise of technology
As Big Pharma developed a model of super-research followed by multimillion-dollar sales budgets for drugs at high margins, companies turned to sales reps who fanned out across medical clinics, hospitals, nursing homes, etc. to educate and provide samples of their offerings. The sales calls were supported by technical research that the reps had been thoroughly prepared on. They were the feature-and-benefit sellers extraordinaire of their time. They were partners in the channel and were to be relied upon at every turn.
This model of big budgets, big research and passing on costs to the consumer reigned supreme for some three decades. Ostensibly, the medical community and the end consumer just couldn’t get enough of what Big Pharma had to offer. Of course, over the decades, the story has another side; a side that eventually toppled the existing structure and the vaunted sales rep.
As Pharma’s research-driven budgets grew larger, the end user’s ability and willingness to absorb the costs through higher premiums and deductibles became real. Many citizens simply could not afford health insurance. Too, the changes in Medicare coverage broadened the federal government’s commitment and coincided with the boomer generation retiring. The country’s debt, driven by expensive programs in Medicare and Social Security, spiraled upwards to 100% of GDP.
Since the Recession, the medical industry has been forced to review its costs, ever-increasing budgets, and byzantine method(s) of reimbursement and payment(s). The forecast is for cost to come out of the bloated industry and its once successful structures, including the pharmaceutical sales rep. But structural costs aren’t the only ones under scrutiny and the only culprits.
Drug research, while still strong, is being challenged by generics. As the old technology patents expire on the brand names, generic drugs become popular as their price points are significantly lower than the original medications. Ergo, the Big Pharma developers and their channel partners are increasingly under a decline in price as technology advances slowly and lower-cost substitutes become available.
Finally, the once informational sales call has been increasingly upended by online videos that explain new medications, the research behind them and their advantages. As my physician stated, “I don’t have much time for sales calls, scheduled during patient hours, but I can access a video many times and review it multiple times for understanding.”
Finally, as if the preceding wasn’t enough, my M.D. mentioned a recent article that reports Eli Lilly was laying off 30% its sales force or more than 1,000 reps.[i]
This story of bloated costs, maturing industry structure and the sales call upended by e-commerce and e-business technology is a familiar one to readers of this blog. The experience of the pharmaceutical industry is an illustration that, when it comes to changes in the wholesale space, other industries are experiencing similar challenges. To their credit, wholesalers have managed to pass along product cost decreases when they became available. However, research on the payroll costs of distribution, as a percent of sales, finds no cost reduction for the past two decades.[ii] And, our work with sales forces finds that distributors have not, as a whole, developed any lasting means of replacing the outside and inside sales forces with technology even as outside, low-cost entrants, sans a sales effort, are making in-roads.
Lessons for the wholesaler
We’ve researched and written numerous articles about e-commerce, e-business and the pending changes in the wholesale distribution space. The cost of solicitation and customer service, often 50% or more of a distributor’s operating costs, is under siege by new technology and buyers who would rather search the Internet or view an online video than pay for sales support. The announcement of Amazon Supply, whose sales prices average 25% less than competing wholesalers[iii], should raise concern for PHCP distributors, especially in commercial replacement markets.
If Amazon Supply fails to strike a chord, PHCP wholesalers may be interested in Zoro Tool (www.zorotool.com ). The entity is a new-age subsidiary of experienced wholesaler W.W. Grainger.The marketing rationale of the entity, launched in the last few months, is a low price and limited service. Pricing at Zoro Tool often runs, at a cursory review, 15% to 20% less than many wholesaler e-commerce sites. The site has some 20 or so large product categories, two of which are for plumbing and HVAC supplies.
Zoro Tool is an example of Transactional distribution where e-commerce and modern-day activity costing are used to identify and then strip out select operating costs and use the savings to entice the customer. Sales and customer support make up a big part of the costs stripped out of the wholesale platform. In essence, the Transactional offering is: “If you know what you want and can order it online, you will get a great price.”
Much of wholesaling isn’t engaged in e-commerce and views it as a limited threat because it is, in their minds and as often pitched by software providers with limited operating experience, a low-cost means of customer service. If a customer saves $1 to $2 per line, there is limited reason to worry about e-commerce. However, when e-commerce is used with activity costing, and management strips out a big hunk of the operating costs while giving discounts on transaction size, the technology becomes threatening. Why? Because transactional strategies go to market at 20% or so less than the full-service competition and, for many commodity buyers, the chance to buy tens of thousands of dollars of material at 20% cost reduction simply cannot be ignored.
Difficulties in the new world
As I was leaving the doctor’s office, a pharmaceutical sales rep entered unannounced and outside the appointed time(s). He was duly turned away by the receptionist who pointed to the posted signs regarding his services.
Today, like the Big Pharma rep, many distributor sellers are being turned away from customers who would rather buy online, sans their services, at a lower cost. Undaunted, the sellers ramp up the call volume with marginal effect on sales, and often this exacerbates the problem as operating cost increases. Customers are seeking a different buying experience and a better deal online and through doing a certain amount of work instead of getting their hands held by sales and customer service. PHCP wholesalers should take notice. The growth of Transactional strategies and wholesalers using technology and new knowledge is on the rise and is likely to transform the industry.
[i] See the WSJ article at: http://online.wsj.com/article/SB10001424127887324240804578417111074635032.html
[iii] Hohner, D. Amazon and Wholesalers, research by Boston Consulting Group, October 2012.
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