A massive public debate has erupted in the last few months in South Africa, and its now in the courts. Its over the control of the price of medicines. In particular, the price at which pharmacists can sell medicines and the mark-up that pharmacists can make. The government is trying to regulate this, and they’re making more problems than they’re solving. They should rather incentivise the whole industry to supply affordable medicine to the underprivileged, instead of imposing unenforceable controls.
Let me provide some context. For the past few decades pharmacists in South Africa had been able to add any mark-up they desire to the medicines they sell, so that they can cover their overhead costs and to make the profit they would like to see as a business. The mark ups that they were able to charge were related to the free market price of medicines and competition between different pharmacies.
Since 1994, the government has been concerned about the high price of medicine and access to health care for the poorest of the poor in South Africa. Our current health minister believes that one of the ways in which the price of medicine can be reduced is to put controls on mark ups and stop kick backs to pharmacists.
Pharmacists were therefore told that they were to charge a maximum mark up on medicines. But, strangely, this maximum was not put in the form of a percentage of the unit price of the medicine, but rather as an absolute figure. This has dramatically reduced gross profits of pharmacies and made it exceedingly difficult for most pharmacies to cover even their basic overhead costs. It should have been no surprise to anyone, in an entrepreneurial free market environment, that the pharmacies would find some way to rectify the situation.
What happened?
What has actually happened in reality is that most pharmacies have complied with the government legislation around mark ups on medicines and have begun adding additional charges that they previously would have just absorbed. These charges include the actual cost of phone calls to medical aids when queries need to be put through; they include administration costs as well as a dispensing fee. Some pharmacies have even charged for the use of the computer system that links them to medical aids for automatic medical aid queries and payments.
Of course this has created a big outcry since these are charges that people are not used to paying. But these are costs that pharmacies have been incurring over the years, funding them from the profit margin they built in to the medicines they sold. Having had those profit margins stripped away from them artificially, they have been forced to recover the costs of dispensing medicines, and in some cases they have used this recovery of costs as a mechanism to get back to the profit margins they had before the price control was introduced.
No surprise
This situation was entirely predictable in an environment of democratic capitalism and free markets. The whole principle of the free market is that it will adjust itself to find the fair price and fair value for any given product or service. Where artificial controls are introduced, either the free market system will break down or it will discover a way to work around those controls, as it has done in this case.
This should not be a surprise nor should it be something that anyone fights against. The only way to develop a stronger economy is to allow the free market system to work its course. If government wants to assist the poor (and it needs to � we need a balance between rampant capitalism and good social support[1]), the government must enter, on a free market basis, into the system and assist the poor through subsidies and using its purchasing power. The arbitrary imposition of control will certainly never work.
But I’m no politician or economist. The reason this story piqued my interest is its implications for business.
Implications
One of the morals of this story for other companies is that in every industry around the world we are moving to both internal and external free markets. ‚Free markets‛ is not just an economic concept, it is a principle that seems to be built into the state of the world in the 21st century. Democracy is either taking root in, or being forced upon, every country in the world. This democracy allows each person to have their say in who gets to lead them and who makes decisions affecting them.
This is not just happening at the political level, our customers are able to do this too. Never before in history have customers had more information about competing products and services within an industry, and never before have customers had as easy access to those competitive product as they do today. The internet and the global trade networks allow customers not only to compare with local competitors, but also globally around the world. The systems that govern the transfer of goods from one place to another are largely transparent so that a customer can make a decision on the ultimate landed cost of the goods that they are looking for and is able to compare and force companies to compete with competitors they weren’t even aware of.
Transparent Competition
Here’s an example of what I mean � and it will start happening regularly, soon. Using your handheld PDA, you walk into an electronic goods shop. You are looking to purchase a digital camera. You look at the options of the digital cameras available on the shelves, comparing the prices that you see advertised and listed. But then you pull out that PDA which uses GPRS technology (or 3G, or 4G, or WiMax, or satellite) and has direct access to the Internet. You go on to any number of websites that will help you to track down international suppliers of the digital camera you have selected in the store (try www.ask.com).
Let’s say for argument’s sake the digital camera in the store is going to cost you R5,000. You have a look on the internet and you see that you can purchase that same camera on line for $300. You then go on to another website, which does the currency conversion (that’s about R1,800). You then have to take into account international posting and packaging costs (available at another website), possibly some insurance and the costs of the import duties (see www.sars.gov.za) that would be paid as that product is landed on your country’s shores, if applicable. All of these costs are known and available to you on the Internet. Everything is transparent. You discover that the landed cost to you of bringing in that same camera would be about R4,000. That means that there is a R1,000 premium on the cost to yourself.
Now its time to speak to the salesperson behind the counter. What is it that the R1,000 premium is buying? Why must you pay R1,000 over and above the price you can get this camera for if you order it online from who knows where? In this particular example, it is buying you some time[2] â€? you get to take the camera home today if you pay a R1,000 – or it would take you three weeks to get that camera if you want to save that R1,000.
So you go to the counter and you speak to the salesperson. You show him all the information you have gathered and you offer to split the difference with him (the store) � you offer him R4,500 for the camera. Your offer is simple: the store can take that R4,500, it can go onto the same Internet website you were on, and at worst can get that camera replaced for R,4000 and in the shop and on the shelves in three weeks time, having made R500 straight off the top. They will probably make more than that, as they might possibly have better channels than the Internet provides to individuals like you. Why would he not accept your offer?
Well probably because he hasn’t got his mind around the fact that we live in a transparent, free market system � he hasn’t learnt the lesson of the pharmacists.
Transparent Companies
The same is happening inside our companies. More and more these empowered customers and democratically alert individuals are beginning to wonder why that same power is not available to them within the workplace. They are beginning to wonder why they never get asked to vote on who should be their next boss when their current boss is promoted or leaves. They wonder why they don’t have any say over company policy and company regulations. They wonder why they simply have to fit in, especially in an environment where the policies, procedures and regulations haven’t been updated in a number of decades and are clearly out of date. They don’t understand why they still get judged on an inputs driven basis, simply being paid for being there, rather than being paid for the value, the quality and the speed of their outputs. The don’t understand why they have to make use of the inefficient internal service departments (like admin, HR, marketing and finance), when they know of better, cheaper and more efficient outsourced companies that could do a better job for less money[3].
When companies are nervous about this kind of thinking amongst their employees, and don’t actively encourage a free market system to develop internally, they are showing that they haven’t learnt the lesson of the pharmacists.
The free market: that transparent economy where everything is known about everything; that connected economy where everything will find a way to connect with everything else; that place where relationships are critical, and where everything and everybody will find its true value and be rewarded for it; the free market that runs the world. We need to realise that no industry, no company, no individual is immune from the forces of the free market economy. Let’s learn the lesson of the pharmacists and make sure that we allow fair value to be fair value. Inside and outside our companies.
[1] This is the basis of UK Labour Party’s ‚Third Way‛, which values both market flexibility and social equity. While not an ideal model, it has certainly been a contributor to Britain’s robust economic performance over the past decade.
[2] I realise that it isn’t only buying you time. In this case, its buying you trust as well. How do you know the package you order online will arrive? It might never be shipped. It might be lost en route, or confiscated at customs. How much peace of mind do you want? And how much are you prepared to pay for it? There is a great opportunity for companies to start selling trust and connection. In a few years’ time the ‚trust‛ systems (like eBay’s system of rating everyone in every transaction) will be fully in place, and online purchasing will be deemed just as safe (if not safer) as buying at the shops.
Graeme Codrington is co-founder of TomorrowToday.biz, a business strategy consultancy that helps companies understand the influences of tomorrow’s world on today’s people. Graeme is a recognised world expert on Generational theory, and is the co-author of two best-selling books, his latest, ‚Mind the Gap‛ published in 2004 by Penguin. He has four degrees, including a BComm and Research Masters, and is currently completing a PhD in Business Administration, majoring in leadership and future studies. He can be reached at [email protected].