No Margin for Error

Companies that will be forced to cut back on sales and marketing spending must focus on value, not volume. Here's how to reduce your spend where it matters the least.
Sep 01, 2005

Since the mid 1990's, every division vice president of a US pharma company has watched as each of the major parts of the organization—brand marketing, sales force, and managed care—has expanded and competed for resources. Growth in the spending of each of these areas now exceeds revenue growth. Industry's spending on all parts of its promotional arsenal—professional detailing, direct-to-consumer (DTC) advertising, and managed care discounting—has increased so significantly that it now finds itself stumbling under the weight of these investments. It's time to cut back. But how?

There are quick, obvious ways to reduce the cost of selling. Some companies, like Wyeth, will cut sales forces across the board. Others (think of TAP and its Prevacid brand) will slash DTC advertising or "just say no" to the trend in managed care rebates. These solutions may reduce costs, but they make no distinction between promotional investments that produce a high return and those that don't. Perhaps the worst solution of all: Some firms reduce sales territories through attrition, leaving opportunity-rich field positions unfilled while racking up costs for less productive positions.


Calculating PMI
Pharma has known for a while that each physician detail is not created equal. A physician may be in the top decile, but he won't generate much in the way of sales if your brand has a third-tier co-pay and patients won't pay it—or if more than half his patients are affiliated with state health programs or insurers that get deep discounts. Two providers can look identical in terms of their script-writing profiles, but one may be worth two or three times as much to the company.

That's not a new idea. Large pharma now recognizes that the one-size-fits-all sales force model has outlived its usefulness. But three things have changed recently to make that model even more obsolete.
  • The Medicare drug benefit's multi-region structure is putting a new focus on geography, and new pressure on understanding customer profitability.
  • Companies now have access to data, from both internal and third-party sources, that let them look far more closely at drug prescribing and purchasing. One key advantage: It is now possible to estimate average margin on a territory-by-territory basis.
  • Because of Medicare and the increased aggressiveness of managed care organizations, access is emerging as a key issue in planning pharma sales strategies.


Reducing Sales Effort Based on Margin
These trends point to an approach that makes it possible to cut marketing and sales costs rationally. Instead of slashing across the board, companies should take a targeted geographic approach to reducing the type and depth of sales force and promotional expense. In particular, two emerging models provide a roadmap to do this effectively. The first focuses on margins, and helps companies cut spending in territories where net sales margins are lowest. The second is an opportunity-based approach in which pharma organizations reduce sales and promotion expenses in specific geographies where managed care has neutralized the impact of detailing.

These business-planning approaches consider sales force, DTC, and managed care rebates as levers that can be pulled in an integrated way to drive company profits. However, they do not yet exist throughout the industry. Instead, they are the necessary future for companies that want to reallocate promotional spending in a way that focuses on value—not volume—and offsets the growth of other sources of controllable spending.

Negative Thinking

You can't underestimate how important it is to control promotional spending when you consider that pharma has deployed between 90,000 and 100,000 sales reps and increased its spend on DTC to over $4 billion since 1997.