Professional Management Consumer Values and the Demand For Professional Services By ROBERT V. EVANSON Certain principles of managerial economics always seem to be mysterious, discussed in jargon best understood by economists. But these concepts can be basic to pharmacy's economic survival. In fact, the success of pricing and promotional policies and procedures is directly reI lated to a clear understanding of consumer values and the demand 1 for drugs and services in relation to pharmacy practice.
I What Is l
Demand?
The economist tends to define demand from the marketer's viewpoint as the number of items to be purchased by consumers at any given price, time, and place. Demand in its true sense is the willingness and ability of a potential purchaser to give up some other value for whatever service is offered by a seller.I This service may be embodied in a physical object which is the subject of the purchase, but the object may serve only a a symbol indicating that the service has been rendered. Any attempt to predict a demand for any product or service must recognize that the key is not the product but rather a host of different unsatisfied desires whose intensities are not equal, even within the same person. Although money may be involved in the final transaction to create an "effective demand," or the amount actually sold, it may be one of the consumer's lesser considerations in the purchase of health care services. What Is Price?
Contrary to the general idea that price is simply a given dollar value for a product or service, in its true sense, price is what a person is willRobert V. Evanson, PhD, is professor of pharmacy administration at the School of Pharmacy and Pharmacal Sciences, Purdue University, West Lafayette, IN 47906.
American Pharmacy Vol. NS 19, No. 6, June 1979/325
ing to give up in return for the satisfaction of using the good or service. It is actually a complex phenomenon that reflects consumer value judgments and provider cost judgments in time and place situations. Traditional efforts by market-oriented providers and bureaucrats to decry prices above the market as gouges and those below the market as loss leaders are common. However, when the consumer becomes a patient, there is no such idea of pricing above or below the market. The charge that patients accept is the market price they are willing and able to pay. · Both the provider and the patient have supply and demand conditions of short- and long-term future satisfactions, which determine the price representative of the potential value created or passed on by the provider and recognized and accepted by the purchaser. Given a set of conditions, the willingness to give up all other satisfaction alternatives for the chosen one creates a demand. Elasticity Is a Cross
The demand for a product is said to be elastic with respect to price if lowering the price creates a greater relative increase in quantity sold than in revenue. In a given environment of prescribers, patients, and pharmacists, and within any given time period-say, one day or one week-a series of therapy judgments will create a specific number of prescriptions to be dispensed. This "effective demand" derived from prescribers' medical decisions is not lik~ly to be changed by any single or group activity to manipulate prescription prices. Thus the demand for prescriptions is for the most part inelastic, and any price reductions will reduce the potential revenue to be generated by these drug orders. The problem does not end here
-it only begins. Any attempt to create an effective demand for any pharmacy must include such satisfaction factors as will cause purchasers to forego willingly all other satisfaction packages known to be available. These packages-or bundles of services-range from a plain, low-cost generic product with no observable service to the highest cost product with all possible services. They are affected by location, convenience, patronage habits for ·other general merchandise purchases, mobility, and severity of need. Product costs may vary for a given prescription because acceptable substitutes or discriminating discounts exist. Operating costs vary as service values are added to investment return goals to cover risks involved. Since these items directly affect both the charge to be paid and the satisfaction to be derived, patients' decisions to choose a pharmacy may be directly influenced by both price and services, especially when both are known by the patient. These relationships are known as cross elasticity of demand. Although the willingness of prescribers to create the demand for drugs may not depend on pharmacy prices, the willingness of patients to patronize a particular pharmacy can be directly related to price, to service, or to an acceptable combination of the two. Thus the interactions of the drug delivery system are based on two general principles. First, the demand for drugs dispensed pursuant to prescriptions is primarily inelastic. Nothing the pharmacist can do in terms of price or service will create another order for drugs or increase the amount prescribed under conditions of rational prescribing. Second, the demand for pharmacy services is elastic for the number of prescriptions to be dispensed by any given pharmacy. Everything the pharmacist can do in terms of price or service will affect his or her ability to attract sufficient patients to maintain a successful practice. If
45
these principles are of value, then their application should be important to professional managerial decisions.
Problems and Solutions The prescriber's goal-effective treatment-is oriented toward therapeutic class and response from one or a few chosen products. If the prescriber generates 25 prescriptions in a day, the competition among manufacturers can be quite keen, and demand within the product class can be quite elastic if substitutes are available. It is possible that the choice of alternatives could be affected by manufacturers' actions and prices within an acceptable range of therapeutic results. If all pharmacists use a professional fee, however, they are uncon-
'Nothing the pharmacist can do in terms of price or service will create another order for drugs ... '
cerned about the manufacturers' problems or the cost of the prescribers' choice. They will dispense 25 units for a fixed dollar margin. Their problem lies in determining an equitable, competitive margin that allows them to capture their share of the 25 units. We can see that the pharmacist's problem, to use the language of managerial economics, is margin elasticity. Any cost that tends to increase initial markup-the fee-will create a higher margin return but also will tend to create a decreased demand because of higher charges. Many pharmacists attempt to juggle the markup-margin values by interjecting buying discounts. For
example, a markup of 34.5% on a standard average wholesale price (A WP) produces an effective margin of 37.4% on actual acquisition cost (AAC). Such activity, however, only makes these pharmacists dependent on the manufacturers' games. They become indirectly involved in product cost problems over which they have no control and may create ill will among prescribers, manufacturers, and even their own colleagues. They also can become unfortunate pawns in the acquisition cost games of third-party programs. The solution is to create a program based on the premise that the demand for professional services must be related to consumer values -in other words, that professional managers will recognize the consumer values that will cause their potential patients to be capable of and willing to give up other sets of values in order to patronize their particular pharmacies. Some patients may be willing to accept all of the services available but are economically incapable of paying for them. Others may be quite capable of accepting all the services but unwilling either to pay for them or to patronize a pharmacy for other reasons. Third-party patients probably will take what is available and not care too much, since they will not have to pay for it under any circumstance. There is no doubt that the cost of services will increase, if for no other reason than inflation. An increase in professional service costs is predictable as more services are offered and standards of practice are raised to achieve clinical pharmacy practice goals. Nevertheless, there is a package of cost-effective services which will be acceptable to individuals and groups in different quantities to create and maintain the need for several types of pharmacies in the foreseeable future.
Effects of Price Posting Recent history relates the great avalanche of price promotion whereby consumers must be made aware of prices so they can shop
around for best buys. A current report on the effect of mandatory price posting offers some interesting comments on consumer value concepts which lead to demand-creating situations. Noting that "the availability of price information should lead to an increased consumer awareness and hence consciousness of what prescription drugs cost," the authors state: "The results of this study, however, seem to correlate more closely with the opinions of the majority of pharmacists (in this study), i.e., that consumers seldom display any interest in the posted prescription prices or request additional information."z There is a package of consumer values that will cause people in your community to forego all other alternatives and willingly seek your services. Each pharmacy must design its package to suit the clientele it serves, or wishes to serve. This package is what allows an independent pharmacy to exist in the same block as a large chain pharmacy and allows a small professional pharmacy to be successful next door to a large independent promotional pharmacy. o
References 1. C.R. Wasson, "The Economics of Managerial Decision: Profit Opportunity Analysis," Appleton-CenturyCrofts, New York, NY, 1965, p. 4.
2. E.T. Kelly Ill and ).M. Trott, Conlemp. Pharm. Prac. 2, 25 (1979).
California Offers Management Aid A successful management consultant, Dennis T ootelian, is leading the California Pharmacists Association Academy of Pharmacy Management workshop, "Developing and Using a Policy and Procedure Manual for the Pharmacy," in five California cities this spring and summer. Each workshop participant receives detailed model manuals for both small and large community pharmacies plus assistance from Tootelian on individual needs.
46 American Pharmacy Vol. NS 19, No.6, June 1979/326
I What Is l
Demand?
The economist tends to define demand from the marketer's viewpoint as the number of items to be purchased by consumers at any given price, time, and place. Demand in its true sense is the willingness and ability of a potential purchaser to give up some other value for whatever service is offered by a seller.I This service may be embodied in a physical object which is the subject of the purchase, but the object may serve only a a symbol indicating that the service has been rendered. Any attempt to predict a demand for any product or service must recognize that the key is not the product but rather a host of different unsatisfied desires whose intensities are not equal, even within the same person. Although money may be involved in the final transaction to create an "effective demand," or the amount actually sold, it may be one of the consumer's lesser considerations in the purchase of health care services. What Is Price?
Contrary to the general idea that price is simply a given dollar value for a product or service, in its true sense, price is what a person is willRobert V. Evanson, PhD, is professor of pharmacy administration at the School of Pharmacy and Pharmacal Sciences, Purdue University, West Lafayette, IN 47906.
American Pharmacy Vol. NS 19, No. 6, June 1979/325
ing to give up in return for the satisfaction of using the good or service. It is actually a complex phenomenon that reflects consumer value judgments and provider cost judgments in time and place situations. Traditional efforts by market-oriented providers and bureaucrats to decry prices above the market as gouges and those below the market as loss leaders are common. However, when the consumer becomes a patient, there is no such idea of pricing above or below the market. The charge that patients accept is the market price they are willing and able to pay. · Both the provider and the patient have supply and demand conditions of short- and long-term future satisfactions, which determine the price representative of the potential value created or passed on by the provider and recognized and accepted by the purchaser. Given a set of conditions, the willingness to give up all other satisfaction alternatives for the chosen one creates a demand. Elasticity Is a Cross
The demand for a product is said to be elastic with respect to price if lowering the price creates a greater relative increase in quantity sold than in revenue. In a given environment of prescribers, patients, and pharmacists, and within any given time period-say, one day or one week-a series of therapy judgments will create a specific number of prescriptions to be dispensed. This "effective demand" derived from prescribers' medical decisions is not lik~ly to be changed by any single or group activity to manipulate prescription prices. Thus the demand for prescriptions is for the most part inelastic, and any price reductions will reduce the potential revenue to be generated by these drug orders. The problem does not end here
-it only begins. Any attempt to create an effective demand for any pharmacy must include such satisfaction factors as will cause purchasers to forego willingly all other satisfaction packages known to be available. These packages-or bundles of services-range from a plain, low-cost generic product with no observable service to the highest cost product with all possible services. They are affected by location, convenience, patronage habits for ·other general merchandise purchases, mobility, and severity of need. Product costs may vary for a given prescription because acceptable substitutes or discriminating discounts exist. Operating costs vary as service values are added to investment return goals to cover risks involved. Since these items directly affect both the charge to be paid and the satisfaction to be derived, patients' decisions to choose a pharmacy may be directly influenced by both price and services, especially when both are known by the patient. These relationships are known as cross elasticity of demand. Although the willingness of prescribers to create the demand for drugs may not depend on pharmacy prices, the willingness of patients to patronize a particular pharmacy can be directly related to price, to service, or to an acceptable combination of the two. Thus the interactions of the drug delivery system are based on two general principles. First, the demand for drugs dispensed pursuant to prescriptions is primarily inelastic. Nothing the pharmacist can do in terms of price or service will create another order for drugs or increase the amount prescribed under conditions of rational prescribing. Second, the demand for pharmacy services is elastic for the number of prescriptions to be dispensed by any given pharmacy. Everything the pharmacist can do in terms of price or service will affect his or her ability to attract sufficient patients to maintain a successful practice. If
45
these principles are of value, then their application should be important to professional managerial decisions.
Problems and Solutions The prescriber's goal-effective treatment-is oriented toward therapeutic class and response from one or a few chosen products. If the prescriber generates 25 prescriptions in a day, the competition among manufacturers can be quite keen, and demand within the product class can be quite elastic if substitutes are available. It is possible that the choice of alternatives could be affected by manufacturers' actions and prices within an acceptable range of therapeutic results. If all pharmacists use a professional fee, however, they are uncon-
'Nothing the pharmacist can do in terms of price or service will create another order for drugs ... '
cerned about the manufacturers' problems or the cost of the prescribers' choice. They will dispense 25 units for a fixed dollar margin. Their problem lies in determining an equitable, competitive margin that allows them to capture their share of the 25 units. We can see that the pharmacist's problem, to use the language of managerial economics, is margin elasticity. Any cost that tends to increase initial markup-the fee-will create a higher margin return but also will tend to create a decreased demand because of higher charges. Many pharmacists attempt to juggle the markup-margin values by interjecting buying discounts. For
example, a markup of 34.5% on a standard average wholesale price (A WP) produces an effective margin of 37.4% on actual acquisition cost (AAC). Such activity, however, only makes these pharmacists dependent on the manufacturers' games. They become indirectly involved in product cost problems over which they have no control and may create ill will among prescribers, manufacturers, and even their own colleagues. They also can become unfortunate pawns in the acquisition cost games of third-party programs. The solution is to create a program based on the premise that the demand for professional services must be related to consumer values -in other words, that professional managers will recognize the consumer values that will cause their potential patients to be capable of and willing to give up other sets of values in order to patronize their particular pharmacies. Some patients may be willing to accept all of the services available but are economically incapable of paying for them. Others may be quite capable of accepting all the services but unwilling either to pay for them or to patronize a pharmacy for other reasons. Third-party patients probably will take what is available and not care too much, since they will not have to pay for it under any circumstance. There is no doubt that the cost of services will increase, if for no other reason than inflation. An increase in professional service costs is predictable as more services are offered and standards of practice are raised to achieve clinical pharmacy practice goals. Nevertheless, there is a package of cost-effective services which will be acceptable to individuals and groups in different quantities to create and maintain the need for several types of pharmacies in the foreseeable future.
Effects of Price Posting Recent history relates the great avalanche of price promotion whereby consumers must be made aware of prices so they can shop
around for best buys. A current report on the effect of mandatory price posting offers some interesting comments on consumer value concepts which lead to demand-creating situations. Noting that "the availability of price information should lead to an increased consumer awareness and hence consciousness of what prescription drugs cost," the authors state: "The results of this study, however, seem to correlate more closely with the opinions of the majority of pharmacists (in this study), i.e., that consumers seldom display any interest in the posted prescription prices or request additional information."z There is a package of consumer values that will cause people in your community to forego all other alternatives and willingly seek your services. Each pharmacy must design its package to suit the clientele it serves, or wishes to serve. This package is what allows an independent pharmacy to exist in the same block as a large chain pharmacy and allows a small professional pharmacy to be successful next door to a large independent promotional pharmacy. o
References 1. C.R. Wasson, "The Economics of Managerial Decision: Profit Opportunity Analysis," Appleton-CenturyCrofts, New York, NY, 1965, p. 4.
2. E.T. Kelly Ill and ).M. Trott, Conlemp. Pharm. Prac. 2, 25 (1979).
California Offers Management Aid A successful management consultant, Dennis T ootelian, is leading the California Pharmacists Association Academy of Pharmacy Management workshop, "Developing and Using a Policy and Procedure Manual for the Pharmacy," in five California cities this spring and summer. Each workshop participant receives detailed model manuals for both small and large community pharmacies plus assistance from Tootelian on individual needs.
46 American Pharmacy Vol. NS 19, No.6, June 1979/326
