As a successful pharmaceutical marketing manager, you have come to realize that not all of your customers are equally profitable, even if one generates more sales than others. Pharmaceutical manufacturers depend on physicians to prescribe their patented and branded drugs over competitive drugs. In one of your teams sales meetings, you suggested departing from industry practice, shifting toward viewing physicians as long-term strategic assets and, subsequently, targeting them based on potential profitability rather than current sales. In addition, you informed your team that by identifying the profitability of physicians, you will be able to not only segment, profile, and target the most profitable group, but also understand their characteristics and offer them more attention. You concluded your presentation by acknowledging that adapting your firms service to your customers profitability level can increase your chances for success in the marketplace. Keeping in mind that your service can be customized to even higher profitability levels, you sort physicians into profitability classifications. Highly profitable physicians can be given VIP treatment and special attention, and customers of average profitability can be encouraged to generate higher profitability. Unprofitable customers can be nurtured and converted to better profitability classifications, while those contributing to losses can be dropped. Figure 1: Application of the Activity-Based Costing (ABC) Method to Customer Physicians Sales of Prescription UFO-x Generated by a Particular Physician (Measured by IMS Health) Physician (A): $10,000 Physician (B): $14,000 Physician (C): $15,000 Physician (D): $18,000 Salesperson Travel ($125 per visit) Physician (A): 10 Physician (B): 3 Physician (C): 5 Physician (D): 30 Service Physicians ($50 per visit) Physician (A): 8 Physician (B): 5 Physician (C): 2 Physician (D): 20 Cost of Free Prescription Samples ($25 per visit) Physician (A): 5 Physician (B): 5 Physician (C): 3 Physician (D): 18 Promotional Giveaways ($60 per visit) Physician (A): 10 Physician (B): 4 Physician (C): 5 Physician (D): 22 1 Cost per Activity # of Visits Dr. A # of Visits Dr. B # of Visits Dr. C # of Visits Dr. D 2 Sales 3 Cost of Rx Sold 0 0 0 0 4 Gross Margin 0 0 0 0 5 Sales Rep Travel 0 0 0 0 6 Service Physicians 0 0 0 0 7 Cost of Rx Samples 0 0 0 0 8 Promotional Giveaways 0 0 0 0 9 Total Activity Expenses 0 0 0 0 10 Operating Profit 0 0 0 0 11 Operating Profit/Sales #DIV/0! #DIV/0! #DIV/0! #DIV/0! 1. You have also prepared the various selling and administrative costs per physician. So, you have provided your team with the following costs. A call from a sales representative costs $125. Providing servicessuch as preparing presentations that include answering the phone, responding to emails, verifying prescription medications claims, and researching prescription medications uses and side effectsto physicians costs $50 per visit. The cost of offering free prescription samples is $25 per visit, and dispensing promotional giveaways costs $60 per visit. What is the cost of total expenses for each customer physician? $2,375, $990, $1,100, $6,520 $2,475, $1,190, $1,200, $6,720 $2,575, $1,390, $1,300, $6,920 $2,675, $1,590, $1,400, $7,120 2. All of your team members are very excited to see the results of their analysis. So, you ask them to calculate the operating profit for each customer physician. What do they find? $155, $2,910, $2,850, $-2,050 $135, $2,710, $2,750, $-2,040 $175, $3,110, $2,950, $-2,060 $125, $2,510, $2,650, $-2,020 3. Your team members are somewhat confused because they are not sure which customer physician is the most profitable. They know that highest sales or highest profit does not necessarily materialize as the most profitable customer. To clear this ambiguity, you instruct them to calculate the percentage of operating profit/sales for each customer physician. What do they find? 1.35, 18.9, 18.7, -11.4 1.55, 19.9. 19.7, -11.6 1.25, 17.9, 17.7, -11.2 1.75, 20.9, 20.7, -11.8 4. The team is happily surprised to learn that highest sales or highest profit does not always correspond to the most profitable customer physician. The team is now ready to categorize the customer physicians in order to start implementing different marketing strategies when targeting them. So, you suggest the following four groups: The stars group is the luminous sphere of physicians most likely to offer the highest return on the firm's sales investment. Contribution margins for the physicians were highest in this group and costs were low. Which physician belongs to the stars group? Customer D Customer A Customer C Customer B 5. The final group may be identified as the meteoroid/space dust group. This group of physicians produces insignificant profit, or even loss due, to complete unresponsiveness to salespeoples efforts and promotional campaigns. They are accustomed to prescribing certain medications and are not open to learning about new discoveries in the pharmaceutical industry. The best strategy regarding this group is to leave it to turn into space dust and move on. Which physician belongs to this group? (Use the above application of the activity-based costing [ABC] method to customer physicians to determine your answer.) Customer C Customer D Customer B Customer A