Accounting mistakes, Part 2: Benchmarking your pharmacy’s wages and departments

Mike Jaczko & Max Beairsto presented at Pharmacy U Toronto on April 1, 2023

In our series of blogs about benchmarking, we’ll discuss the best ways to answer a couple of vital questions about your pharmacy business: How much should you be spending on wages? And how do you know if your pharmacy’s departments – front-of-store and dispensary – are profitable enough?   

As with other parts of a pharmacy business we have discussed in previous articles (inventory, professional services and dispensary operations in particular), establishing benchmarks in these areas can help pharmacist-owners improve profitability and enhance their business's value when it comes time to sell.

Why benchmark?

Because getting where you want to go is only possible if a) you know where you want to go and b) you know where you’re starting. That means measuring the right things about your pharmacy’s operations and developing appropriate targets for performance – in short, good metrics and good benchmarks. When it comes to wages, we have found that most pharmacist-owners are fairly diligent about keeping track of what they spend on labour. We have also found, however, that many do not do it in the right way. On department contributions, they are usually less engaged, and when they do turn their attention to the issue, they often only get it half-right.

Metrics for wages

For a long time, most pharmacies measured the effectiveness of their wage costs by calculating wages as a percentage of overall revenue. Back when margins were high and most pharmacies dispensed pretty much the same kinds of medications, that calculation served pharmacist-owners fine. But that was then – this is now. And now, high-priced specialty drugs have skewed the dispensing landscape. Pharmacies that dispense a lot of specialty drugs can have sky-high revenues but be no more profitable than a pharmacy that dispenses hardly any. If both pharmacies use wages as a percentage of revenue as a benchmark, then the high-specialty pharmacy’s wage spend will look unrealistically low and the low-specialty pharmacy’s spend will look artificially high. As benchmarks go, you would be comparing apples to pomegranates.

In today’s world, the better metric is Wages as a Percentage of Gross Margin (WPGM). Gross margin is the money your company has left over after the direct costs of producing or buying goods or services is accounted for: revenue (including professional services) minus cost of goods sold (net of commercial terms), or COG. Because it takes COG into account, WPGM does not get deflated just because a pharmacy dispenses a lot of specialty drugs, nor does come in higher than other pharmacies if a dispensary has little specialty business. So, for most pharmacies, it provides a solid benchmark for indicating whether you are spending the right amount on your staff.

The industry average WPGM in Canada is 45%, representing a reasonable benchmark for most Canadian pharmacies. But 45% WPGM won’t be the right benchmark for every pharmacy. For low-volume dispensaries, it will probably be unattainable; they should aim for a higher WGPM. And for high-volume pharmacies, 45% is probably too high – they should aim lower especially if there are robotic dispensing systems (which, in this case, is really aiming higher, right?).

Benchmarked appropriately, WPGM as a metric can suggest opportunities for rightsizing or training your staff. And if it’s combined with other benchmarks for staff efficiency like scripts filled per hour or professional services revenue, WPGM can point you in the right direction for reallocating staff resources among your pharmacy’s different departments. So, if your WPGM shows you are spending over the benchmark on staff, maybe it’s not the case that you are spending too much; maybe you just need to spend it in the right place.

Pharmacy department contributions

Next, let’s take a look at pharmacy department contributions – which is something that many pharmacist-owners, sadly, don’t take the time to do. Most have a really good idea of their dispensary business, but they quite often don’t pay enough attention to front-of-store, at least in our experience. But front-of-store can be big business: particularly in a niche market, sales volumes there can range from $250,000 to $750,000 annually, and we have seen some independents top $2 million in sales. That is a lot of money to ignore.

To really get an idea of whether your pharmacy’s departments are profitable enough, you want to measure their performance against their share of wages, rent and other expenses. A simple way to do that is to subtract the department’s share of fixed expenses (sometimes calculated as its percentage of the pharmacy’s total square footage) from its gross margin. If the two numbers are out of whack, then it might suggest that you are dedicating too few or too many resources to the department.

If so, you will probably have some work to do. You should look at how you are allocating staff to the department in question, but also at inventory and marketing. If we’re talking front-of-store, a buying group or banner program can often help you enhance your pharmacy’s buying power and profit margins through private-label goods, plan-o-grams and other strategies.

One of the reasons pharmacist-owners fail to use benchmarks is that they think the whole business is all too complicated. But as we hope we have demonstrated through this benchmarking series, measuring business performance and coming up with goals for improvement doesn’t have to be hard work. And if you remember only one thing, remember this: if it’s worth doing, it’s worth measuring. Doing it right will not only boost your pharmacy’s profitability, but also help maximize its value.

Mike Jaczko & Max Beairsto presented at Pharmacy U Toronto on April 1, 2023