Profitability is the lifeblood of any business and pharmacy is no different in that respect. Clients that I work with include a mix of retailers where pricing, cost management, and stock control are paramount. In this article, we will explore what levers on profitability are available for pharmacies, including the different revenue streams and the influence you have on managing them.
Let’s first discuss what we mean by the term ‘profit’. Profit, for the purpose of this article, is the earnings of the business before interest, tax, depreciation and amortisation (i.e. EBITDA). For pharmacy owners, increasing profit generally allows savings to accumulate to invest in business improvements, higher wages to be paid to owner operators or greater returns for pharmacy owners or shareholders. The obvious levers on profitability are revenues and expenses. Let’s look at what they comprise of and how we can influence them as a lever on profitability. Revenues Pharmacies typically generate revenue from three primary sources: dispensary, retail, and professional services. They’re the levers on profitability that can be managed independently and through a variety of ways. Pharmacists, managers and your retail team all play a part. The dispensary is often the backbone of any pharmacy’s income. To strengthen and grow this revenue stream, you can build customer loyalty and relationships with local doctors. Customer loyalty is strengthened by providing great customer service that encourages customers to return time and again. There’s nothing better than feeling welcomed and remembered, having personal service and feeling cared for. Strong ties with nearby GP and healthcare practices provides patients with continuity of care. If your local GP can call you to discuss patient care and medications, and vice versa, you’ll be building trust and loyalty in the community. Retail revenues are another area of focus for increasing profitability. Cosmetics, vitamins, over the counter medications, are all vital contributors, as is your pharmacy layout and education of your retail sales team. Having a well structured retail environment encourages customers to browse and purchase additional items while waiting for their scripts. Most likely your pharmacy trades under a banner or buying group, who provides pricing guides on recommended retail pricing. You can then set your prices from the guide or modify them to reflect your location and competition. In recent years, pharmacy services have extended, largely influenced by COVID and then since in the Community Pharmacy Agreements negotiated between the Minister for Health and Aged Care and the Pharmacy Guild of Australia (refer, for example, to the 8CPA). Vaccinations, flu and covid shots, packing services for local aged care facilities and nursing homes. In some states, new legislation will soon be introduced which will enable pharmacists to write some scripts, further enhancing revenue potential. Make sure you are educated on the latest updates and understand the range of services that can be offered by pharmacies and market them to your customer base and community. It will make quite a difference to your revenues. Expenses Cost control is essential to improving profitability. For pharmacies, the major cost drivers include labour, property expenses, and stock management. From my experiences, labour can comprise around half of your monthly costs. Given rising pharmacist wages and workforce shortages, invest in both technology and training to maximise your pharmacy efficiency and effectiveness. Packing machines and dispensing robots are becoming increasingly popular, relieving staff to focus on services. Ensure your retail team has sales training to enhance customer service and drive selling opportunities. Pharmacies often face high rental costs, particularly in shopping centres and prime locations. Keep note of your lease dates and begin lease renewal discussions early to ensure you have time to compare market rates and negotiate favourable terms. Make sure to avoid clauses that tie your lease to increases to CPI. I’ve seen some lease agreements with clauses that increases rent by CPI+10% – it’s a trap to be wary of. The other area to manage carefully is stock. Take note of stock turnover and don’t over buy to avoid tying cash up in slow moving inventory. Regularly review supplier agreements to ensure you’re getting the best deals. Be cautious of sign-on bonuses or rebates that could lock you into less favourable terms in the long run. Key metrics to watch When you’re focused on profitability, the key metrics I like to track to inform your decision making are:
Improving profitability will help you to build a sustainable and profitable business. Whether through professional services, effective stock management, or maintaining competitive pricing, every small adjustment can add up to significant improvements in your bottom line. Remember, profitability isn’t just about more sales – it’s about many smart business decisions that will grow your revenues and adjust your operational effectiveness. About the author Krista Fenix is a Manager at Holman Hodge. She works with over a dozen pharmacies and has also built a close affinity with retail and hospitality clients. Personal experience working in a multigenerational family business and as a qualified Family Business Advisor brings a valued perspective to pharmacy clients, particularly those entering or exiting an ownership group. |