Out of the Box

Learning from the Drug Wars

By Menachem Lubinsky on February 01 2008

While in Miami Beach recently, I received a flyer offering me a $25 discount if I would bring my drug business to Walgreen, one of the nation’s largest pharmacy chains. Walgreen was obviously trying to lure customers from some of the other large chains, namely CVS in the South. Walgreen’s marketing strategy was to offer the $25 with the knowledge that every customer who switches represents thousands of dollars in profits.

Trying to snatch customers from a competitor is certainly not novel, but in the pharmacy war, the payoff can be huge. In 2006, Wal-Mart made news when it announced that it would sell hundreds of generic drugs for only $4. The marketing world at the time thought of the move as an effort to deal with an increasingly tarnished image of mistreating its work force with low wages and other sub-standard conditions. The $4 drugs would be a message to America that Wal-Mart cares, particularly for the elderly and poor who cannot afford the high prices of their medications.

But now it appears that Wal-Mart was actually making its move to enter the lucrative drug market, especially at a time when the pharmaceutical companies were literally dumping thousands of generic drugs in the marketplace. While Wal-Mart offers more than 350 generic drugs for as low as $4, it is now apparent that the gimmick worked, both in terms of its image and in moving aggressively into the pharmacy market.

The Walgreen flyer is also not new in that companies often invest into attracting customers with the logic being that if the customer bites the return will be far greater than the investment. Banks were notorious for attracting deposits that most often came from other institutions by offering the now legendary toaster, which by today may have graduated into an iPod. Their logic was very similar to Walgreen’s in that they calculated the potential gains if a customer transfers their business.

The Walgreen offer was definitely the right chord to strike. The company certainly considered that the large elderly population in South Florida would be attracted by the $25 offer. This is an extremely important ingredient in any marketing promotion. Some of the best laid promotional plans fall short because the incentive was undervalued. Walgreen probably calculated that $25 would attract interest while anything less might not.

Pharmacies throughout the country are upgrading their stores with such amenities as waiting rooms, blood pressure testing, newspapers and even coffee or tea. Their new “user friendly” approach stems from the realization that every customer can potentially result in thousands of dollars for the company. Despite the “upgrades,” surveys show that customers still gripe at the service in the nation’s pharmacies. They cite long lines and not so friendly personnel, which some chains have been changing.

The drug war could be a good lesson in looking at the whole concept of luring away customers from competitors. Walgreen is assuming that the experience at their pharmacy is identical to that of competitors like CVS. It cannot tell a loyal CVS customer that the experience at the counter will be any better. In all likelihood, it cannot win on price since competitors will match the price. Even Wal-Mart’s $4 steal for generic drugs was matched by competitors.

The best chance to lure away a customer is to do what Walgreen’s did. It offered large enough of an incentive that it knew would receive instant notice and perhaps equally instant results. A good example of an undervalued incentive was the offer by a mortgage company several years ago in the height of the real estate boom to give a new glass key chain to successful customers. The company says that it leads to many new accounts, but one has to wonder whether anyone would select a mortgage company because of a key chain.

Pharmacies also have another gimmick at their disposal in a rather full bag of tricks. They print flyers and offer steep discounts to many over the counter drugs, cosmetics, and beauty aids. Like other loss leaders, the objective here is to get the customer to shop the store and perhaps consider using the pharmacy while they are there and the pharmacy is where the money really is. Advertising by pharmacies rarely focuses on prescription drugs, because of how competitive pharmaceuticals have become. The pharmacies know that in a price war no one wins.

In striving to get customers to switch pharmacies, there are no set rules that places limits on what one can do. The pharmacies know that the drugs will be purchased and it might as well be them. It isn’t as if they are creating a need; it is already there. In fact, they hope that the drugs will only serve as an entre to the rest of the store, which consists of numerous profit centers, including cosmetics, over the counter, beauty aids, housewares and even groceries.

There is much businesses can learn from the drug battlefront. They can learn to appreciate that a strong category of customer to pursue is a one who is with a competitor. The challenge is to identify that customer and to encourage them to make the switch. Too often businesses turn a blind eye to existing customers who are with competitors. Creating the right incentive to switch is yet another lesson learnt from the drug wars. Attracting the customer through loss leaders certainly works. Finally, keeping the customer is as important as getting them. Just ask Wal-Mart, Walgreen and CVS as they battle it out for the multi-billion dollar pharmacy business.

Out of the Box is a collection of strategic marketing articles that Lubicom has published on various topics, trends and ideas in the marketing world. The articles have been published in the Hamodia weekly newspaper circulated on three continents to a readership of well over 100,000.

The name, "Out of the Box" is a term used frequently in business nowadays to describe creative thinking that is not the norm. It is meant to help a business pull away from the pack or separate oneself from the competition. It is to some extent fraught with risk, simply because it is not the run of the mill thinking, but it is at the same time the key to reaching the next opportunity.