The $4 fallacy

Broken Arrow Family Drug blog

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  • 5 February 2010
    Health & Wellness
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    The $4 fallacy

    It seems like it is every day that I have someone ask, “Do you match the $4 programs at your competitor?” We all know who that “competitor” is – it’s the one that everyone gripes about their service, but they continue to shop there because they think it’s so much cheaper than everyone else. No, I won’t name them, but you know……

    Well, my answer to their question is always “no”. I could go through the discussion about why you get much better service from our pharmacy than the “$4 Store”, but you already know that you can get better service anywhere but that store (did you notice that the $4 Store didn’t make the BA Ledger list of Favorite Pharmacies? Wonder why that is?).

    Lousy service aside, the $4 Store program is a bit of a bait-and-switch going on. “But I save TONS of money by using the $4 Store”, you may say. Well, I would contend that you need to step back and look at the bigger picture – you’re not saving as much as you think. You may actually be LOSING money.

    Allow me an example. Let’s say that you ran a business selling widgets and snack cakes. You sell two styles of widgets – a cheap one and a fancy one. You also sell a variety of snack cakes because folks who come into your widget store get hungry sometimes.

    One day you get a great idea. You’ll start selling your cheap widgets for less than half what it costs you to make them. Word will spread like wildfire that you sell cheap widgets for a lot less than the competition, and when folks come in to buy the cheap widgets, maybe they’ll buy the expensive widgets and some snack cakes, too!

    Step back and look at this from a BUSINESS perspective for a second. You’ve decided that as a marketing strategy, you’re going to cut your prices (and gross profit) by over half on your CHEAP widgets. Did your other expenses go down? Did you fire some employees so you didn’t have to pay them? Did the rent go down just because you decided to lower the price? How about the electric bill? Did the cost of a bag in which you will put the widget go down?

    Just because a business lowers the selling price of a product doesn’t mean that its other expenses (what we call “overhead”) changes. The landlord doesn’t lower the rent just because the business lowers its price. The electric company doesn’t charge you less just because you sell products for less profit.

    Going back to our example, the answer is – no, the business’ other expenses do not go down.

    So how does your company make up the profit you are giving away on the promotion? By selling your fancy widgets for a higher price, and making the environment in your store such that people buy more of your snack cakes. If you lose $5 profit on your cheap widget, you mark up the fancy widget by $5 to make it up. And you keep the customer in the store waiting longer than they used to, buying more of your snack cakes, while you make their cheap widget.

    Theoretically, the store could sell TWICE as many cheap widgets as they used to (since you’re selling them at half-profit) and keep the fancy widgets at the same price, but they wouldn’t be able to add any more overhead (hire more staff). Do you REALLY think you can get twice as much work out of a barely-over-minimum-wage person and keep them for any length of time?

    You see where I’m going with this. The $4 Store has generated a great deal of industry buzz by marking down some cheap prescriptions. Do you REALLY think that their profit has gone down as a result? They can only make up their lost profit in two ways –

    marking up the NON-$4 prescriptions, or keeping you in the store longer while you buy their other “stuff”.

    The $4 Store promotion works GREAT from a management standpoint. The promotion STINKS from a staff standpoint. Unfortunately for both, people have started figuring it out. People had their doctor change their prescriptions from a more expensive brand name product to a $4 alternative. People who didn’t have $4 prescriptions got smart and realized that either A) their prescriptions were cheaper elsewhere, or B) their copay was the same elsewhere. They got tired of being treated like a $4 customer when their prescription wasn’t $4.

    And slowly but surely, the $4 Store is filling a larger and larger percentage of $4 prescriptions. And I couldn’t be happier.

    You see, the more $4 prescriptions they fill, the fewer people they can staff, the longer the wait times, the more unhappy the staff and customer become, the more people look in that shopping basket and wonder whether it’s worth it to wait.

    “But I don’t buy anything else there,” you say. “I just go in and get my prescription and come right back out.” Get back with me after you’ve walked that 1/8 mile into the store, past the two folks fighting for the electric cart, and waited in line for 15 minutes – only to realize once you get back to the car that there’s a mistake on your prescription.

    And I hope you don’t have to talk to the $4 pharmacist. Good luck with that. (Can you imagine the self-esteem level of someone who knows that their non-pharmacist boss values their Masters-level education at less than $4 per prescription?)

    So we’ve established that when you use the $4 store, the non-$4 prescriptions are more expensive and/or you’re shopping for a bunch of other stuff that you probably don’t need while you’re there, all because the $4 Store has to make up that profit somehow. One last point – what is your time worth? That’s a sincere question. Are you worth $10 per hour? $20? $40? What’s it worth to be at home with the kids having dinner instead of walking the pet department waiting for your prescription? What’s it worth to get home quickly when you feel like someone beat you with a tired stick?

    Let’s say that you can get in and out of my store in 10 minutes, with all of your prescriptions filled and done. Next time you’re getting out of the car to walk into the $4 Store, check your watch. When you’re back, check it again. Ask yourself what that extra time was worth. Then come see me.

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