Pricing OTCs

Pricing Over-The-Counter Drugs

Definition of OTC (Over-The-Counter) Drugs

• Drugs that can be sold without a prescription.

• Commonly found in the "front shop" of pharmacies.

• Customers have the ability to choose the product they want.

OTC Drug Schedules

• According to NAPRA’s National Drug Schedule:

  • OTC drugs classified under Schedule III and Unscheduled drugs.

  • Pharmacy professional intervention is readily accessible for these drugs.

Key Components of OTC Pricing

Components Overview

1. Cost Price = SP (Selling Price) or SRP (Suggested Retail Price)

2. Margin = Profit

Profitability Requirement

• For a pharmacy to be profitable, the following condition must hold:

  • Cost must be less than the selling price.

  • The relationship can be expressed as:

  • ext{COST} < ext{SELLING PRICE}

Calculating Selling Price from Cost and Margin

Selling Price Calculation

• If Cost and Margin are known, calculating Selling Price involves:

  • Formula: ext{COST PRICE} = ext{SP} ext{ (Selling Price)} - ext{Margin}

  • Components:

  • COST: Known

  • MARGIN: Known

  • Calculate: Selling Price (SP)

Cost Calculation from Selling Price and Margin

• If Selling Price and Margin are provided, to find Cost involves:

  • Formula: ext{COST} = ext{SP} imes (1 - ext{Margin})

  • Components:

  • PRICE (SP): Known

  • MARGIN: Known

  • Calculate: Cost

Examples of Pharmacy Business Math

Relevant Calculations

• Pricing an Rx (prescription)

• Pricing OTC (medication or other ‘front shop’ items)

• Calculation of sales/revenue

• Calculation of profit

Relevant Terminology

Definitions

• Sales/Revenue/Income: Total money received from sales.

• Cost: Pharmacy Purchase Price (the amount paid by the pharmacy to acquire the drug from wholesaler or manufacturer).

• SRP (Suggested Retail Price): Price customers pay when the drug is sold.

• Discount: Reduction from the usual charge.

• GP (Gross Profit): Total profit earned by the pharmacy.

Gross Profit Calculation

• GP can be calculated as:

  • ext{GP} = ext{SRP} - ext{COST}

  • Rearrangement gives:

  • ext{COST} + ext{GP} = ext{SRP}

Understanding Gross Margin (GM)

Definition and Calculation

• Gross Margin is often represented as a percentage, indicating the desired profit:

  • E.g., A pharmacy may aim for a 40% profit on a product purchased for $6.00.

Application of Gross Margin

• Using the formula for SRP:

  • ext{COST} + ext{MARGIN} = ext{SRP}

• Expressed in a table format for clarity, e.g.:

  • | Cost | Margin | SRP |

  • | 60% ($6.00) | 40% | ? |

Ratios in Gross Margin Calculation

• Conversion of percentages to decimals:

  • ext{Cost} = 0.6, ext{Margin} = 0.4

  • Use cross multiplication:

  • 0.6x = 6

  • ext{x} = rac{6}{0.6} = 10

  • Therefore, ext{SRP} = 10

Example Calculations for SRP

Example 1: Pharmacy Calculation

1. If invoice cost is $6.00, margin desired is 33 1/3%:

   • Find SRP:

   • Cost = 66 2/3% (0.667)

   • Margin = 33 1/3% (0.333)

   • Cross multiplications result in:

     • 0.667x = 6

     • x = rac{6}{0.667}
       ightarrow ext{SRP} = 8.99

     • Margin can also be calculated as:

     • ext{Margin} = ext{SRP} - ext{COST} = 8.99 - 6.00 = 2.99

General Formula for SRP Calculation

• If you follow the established steps:

  • Convert percentages to decimals.

  • Use margin percentage:

  • ext{SRP} = ext{COST} imes (1 - ext{m/u}), where m/u is the margin expressed as a decimal.

Notes on Terminology

• Be aware that 'markup' and 'margin' can often be used interchangeably in casual discussions, though they represent different calculations in strict terms.

Mark-up Amount and Mark-up Rate

• Mark-up is commonly understood as a percentage (m/u): varies by item type:

  • Cosmetics: 60% markup

  • Confectionary: 25% markup

• Important: HST taxes calculated on Selling Price (SP).

Example Calculations of SRP by Product

• Vitalux 50 Caps

  • Cost = $5.99, Margin = 40%

  • ext{SRP} = rac{ ext{Cost}}{(1 - ext{Margin})} = rac{5.99}{(1-0.4)} = 9.98

• Boost

  • Cost = $6.74, Margin = 25%

  • ext{SRP} = rac{6.74}{(1-0.25)} = 8.99

• Acid Reducer

  • Cost = $3.20, Margin = 60%

  • ext{SRP} = rac{3.20}{(1-0.6)} = 8.00

Calculating Cost from SRP

• Given SRP and Margin, the cost can be calculated as:

  • Rearranging the formula:

  • ext{Cost} = ext{SRP} imes (1 - ext{m/u})

• Example Products:

  • ReNu Solution:

  • SRP = $13.99, Margin = 75%

  • ext{Cost} = 13.99 imes (1 - 0.75) = 3.50

  • Nic-Assist:

  • SRP = $19.99, Margin = 55%

  • ext{Cost} = 19.99 imes (1 - 0.55) = 9.00

  • Dandruff Shampoo:

  • SRP = $3.99, Margin = 90%

  • ext{Cost} = 3.99 imes (1 - 0.90) = 0.40

  • Muscle & Back Pain:

  • SRP = $5.99, Margin = 65%

  • ext{Cost} = 5.99 imes (1 - 0.65) = 2.10