By 2002, it is estimated that $4.4 billion will be spent on prescription drugs. Statistics indicate that 32 percent of consumers shop for health products online, estimated Dan Twibell, president of NGDA Interactive Communications, speaking at an ePharmacies conference last year.
With such upbeat predictions about the eHealthcare economy, who can blame the online pharmacies for jumping straight in? The lucrative market had to be captured.
But most ePharmacies made a fundamental mistake. In their rush to lure customers to their sites they overspent. In the fourth quarter of 1999, drugstore.com spent $25 million in advertising effort alone. Drugstore.com acquired only 267,000 customers as a result of this spend, Mr Twibell suggested, and this translates to an acquisition cost per customer of $94 with total revenue per customer being only $27.
This heavy advertising failed to bring spending customers to the sites. Although the ePharmacies didn’t realize it at the time, alternative and far more effective methods are available to achieve success. As ‘survival of the fittest’ becomes more prevalent, how do you become strong?
Join up to conquer
Online pharmacies have realigned their strategy and sought alliances in a bid to improve their performance. Partnerships bring more consumers to a site in a cost effective manner, and help to build a sustainable business model that will not burn through cash reserves.
Key alliances early on are important, rather than spending lots on promotion. This strategy, outlined by drugstore.com in a company statement, aims to build brand recognition, increase customer traffic… add new customers, build strong customer loyalty, maximize repeat purchases and develop incremental revenue opportunities. Mr Twibell predicts that drugstore.com’s commitment to this new strategy will make it the leading pure online player within the next five years.
One of drugstore.com’s strategic relationships, established in 1999, is with the pharmacy Rite Aid Corporation. Rite Aid’s online customers are directed to drugstore.com’s web site for the option of online pharmaceutical purchases; the two companies also undertake co-promotion and co-branding activities, which cut the costs of going solo. Additionally, drugstore.com gains crucial access to the insurance companies and pharmacy benefit managers (PBMs) with which Rite Aid already has relationships. A customer would never use an online pharmacy if they could not be compensated for the cost of drugs; PBM’s can control where a prescription is collected and a relationship needs to be established.
The ability to be transparent in prescription benefit is a quality a site should possess. Consumers will go to ePharmacies which have a single factor transaction covered by the company’s own insurance, where there are no manual forms for reimbursement, Mr Twibell notes.
Drugstore.com’s relationship with GNC further draws consumers to the site. The online pharmacy has the exclusive right to sell and be the online provider of GNC-branded products. The two companies also conduct reciprocal co-promotion of drugstore.com and GNC products in traditional and online marketing efforts that direct customers to the site.
Perhaps the most prestigious of drugstore’s alliances, formed in January 2000, is with Amazon.com. Amazon promotes drugstore.com by integrating various shopping features and creating a persistent drugstore.com shopping presence. Drugstore.com also gains from the prestige of its association with a premier eCommerce company. Indeed, Amazon is now drugstore.com’s largest shareholder.
Such joint ventures have not been limited to drugstore.com. CVS Pharmacy has also made efforts to establish lucrative relationships. We have also formed unique, industry-defining alliances with other healthcare leaders. For example, we announced a broad-ranging strategic alliance with Merck-Medco, a leading PBM, as well as a strategic partnership with Healtheon/WebMD and a joint venture with Pfizer, reads a statement on the company’s website.
In terms of growth, the company adds, CVS’s growth strategy focuses on driving top-line revenue growth, improving operating efficiencies through technology investments, and ensuring that the company achieves appropriate returns on the capital it deploys. Mr Twibell is confident this company will do well too. CVS Pharmacy is well positioned and will continue to be a leader among the offline retail pharmacy operators.
Combination solutions
The combination of an offline and online presence will ultimately capture more of the market by catering for more consumers’ needs. These include providing alternative delivery methods or improving acute illness management. CVS became the first major integrated ‘clicks-and-mortar’ pharmacy in 1999.
The combination approach looks like an early winner. Dr Jochen Wiechen, vice president of software engineering at detango.de goes a step further. Pureplays and bricks-and-mortars will evolve to hybrids, he states.
Nevertheless, the future is still far from settled, especially for the pureplays. Unlike CVS, Eckerd and Walgreens, drugstore.com, for example, still does not have a strong offline presence and this is proving to be its Achilles heel. The company has been forced to sack a large number of staff and further reduce marketing costs in an effort to cut expenditure. These drastic moves were necessary despite recent improved performance with a gross profit margin in the fourth quarter of more than 13%, compared to a negative 16.3% at the same point the year before.
The company needs to increase its offline presence through joint ventures if it wants to survive, says Rhodri Jones, analyst at Datamonitor, but, with stronger brands and more assets, it may be the offline companies that end up buying it out. Multi-channel strategies are increasingly prevalent in the industry; drugstore.com needs to develop its offline relationships if it wants to keep up. Only alliances with – and probably investment from – offline companies will ensure its long-term viability.
Who’s left?
Finding new offline distribution partners may prove to be a difficult task, however, as most of the large US pharmacies have established their own Internet presence. So a deal may come in a less favorable form for drugstore.com and its other pureplay counterparts. As Mr Jones predicts, Such well known Internet brands will continue to be attractive to offline players who view their purchase as the best way of reducing the cost of setting up Internet businesses. Like Healthzone’s purchase of Healthshop.com, the future for drugstore.com may be in a buy out.
It appears that for pharmacies at least there is ultimately no such thing as dotcoms. The pureplay ePharmacies will not replace the traditional bricks-and-mortar stores as once thought. If they survive at all they will simply provide another delivery option. The winners, however, will be those companies that have every medium covered to maximize their offering to the ever more powerful healthcare consumer.
