Margin for error

A big reason natural food and medicine took so long to become mainstream, as it is today, is that most of the growth was through word of mouth, either through family, a friend telling a friend, or from people working in a health food store.

Remember, ALL natural health products were first sold in a health food store. No mainstream company would have touched internal oregano oil, for example, if it was not already a top seller in health food stores with Dr. Cass. This is the same with food.  Early soy drinks and veggie meats, as an example, launched only in health food stores.

I believe natural medicine is UNDERVALUED.  Let’s compare natural medicine’s number one competitor, pharmaceutical drugs.

Of the top selling drugs, Lipitor to lower cholesterol, has annual sales of $14 billion.  This is not a misprint.  A recent report showed the price is 47 times the cost. A $5.80 cost sells for $272.37.

At this margin, Lipitor contributes $11 billion after cost of the drug to the company. Oh, but hey, they do spend hundreds of millions on questionable clinical trials, so perhaps only $10 billion after cost of testing included. And this is just one drug!

Imagine a natural remedy for cholesterol (safer and probably as effective) and the  rep tells you it retails for $272.00.…yeah…right!  The cholesterol lowering drug category sells more than all natural medicine in North America…for a suspect condition.

But it is no wonder, as they have the best salespeople of all time to push their products  – MD’s – far and away the best sales people in history. “If you go off it, you will die,” or, “I will be unable to remain your doctor if you go off the drug.” And then there is the classic “It is only expensive urine to put natural medicine in its place.”  Talk about some great closers. Imagine a rep telling you “If you do not buy my product, you will go out of business” 

So let’s look at our industry margins.  A quick and dirty formula for determining retail price, working from cost at manufacture is: The manufacturing cost multiplied by five = suggested retail.

Natural medicine is safer

So for the same condition, a $5.80 manufacturing cost product would sell for $29.95 not $272.  It is definitely safer, so why is natural medicine not the first remedy prescribed by MD’s?

Natural health retailers average a 40 per cent margin so the retail cost is $17.97.  Distribution requires at least a 35 per cent margin so their cost is $11.68. Distributors often work on very low margins.  This leaves the manufacture/brand developer with a 50 per cent margin, to build the brand. A one time mark up compared to a 47 times mark up.

Many companies never consider launching unique new products due to the financial risk.  They look to other companies to create a greens, oil, CoQ 10, oregano, etc. category and then if the product/category does well, go in with a low price copycat.

A challenge in the future for natural medicine is the products becoming commoditized. More ‘me too’s’ than unique formulas now fill the shelves. Discounts drive margins even lower, taking up valuable promotional dollars we need to tell our important stories to the public who are inundated with pharma influence.

In 2012, phamaceutical companies spent the following:

• $15 billion on face-to-face sales calls with pharma reps.  It works out to be one rep per nine doctors.

• $5.7 billion on free samples

• $3.1 billion on direct to consumer ads, primarily TV

• $2.1 billion on education and promotional meetings

• $1.2 billion on promo mailings

• $130 million on clinical trials – ONLY  $130 million, not billions

• $90 million on ads in professional and academic journals. This generates more return per dollar than other forms of advertising.

But the one thing pharma margin cannot buy is the difference in how a person feels living a natural lifestyle, represented by you, the natural health retailer.  •