Do fewer sales reps mean higher profits? Researchers from Penn State, University of North Carolina, and Erasmus University recently discovered this counterintuitive effect in the pharmaceutical industry. They found that if all competitors in an industry sharply decreased their sales forces, they would all experience small sales dips but ultimately would see significantly higher profits. In following this advice, pharmaceutical firms can address concerns from diverse constituencies and remain profitable.
The Problem
For years, pharmaceutical firms have been in an arms race – employing an ever-increasing number of sales reps to convince doctors to prescribe their drug rather than the competitor’s drug. This arms race has led to a competition-driven escalation of the number of sales visits to doctors’ offices. The first to question this arms race were public policy makers (What social welfare is created?), the media (Does this inappropriately influence the doctor to prescribe the most detailed drug instead of the best drug?) and doctors (Are pharmaceutical sales reps only interested in commercial gain?).
More recently, though, pharmaceutical firms have started to question the arms race themselves from a profit-making perspective: Would we all make more profits if we would all substantially decrease our sales forces? Kappe, Venkataraman, and Stremersch’s research is the first inquiry in the public domain to address this question. They estimate how competitors would respond to large, unprecedented sales force decreases of their competitors. How would doctors respond in their prescription behavior? And given competitors’ and doctors’ responses to decreases of the sales force, would the initiating firm make more profits? To answer these questions, they developed a new scientific method that combines the best of two worlds – the best ways to estimate sales response based on observed behavior and the best methodologies to experimentally test competitive responses to what-if scenarios.
The Data Enrichment Method
They call their method data enrichment. First, they observed doctor prescription behavior and firm detailing behavior in a very large panel of doctors. Next, they developed various scenarios of how a firm could decrease its detailing and measured the stated reactions in detailing of competitors. This method allows the integration of both data sources – observed detailing and prescriptions and stated supply of detailing – to gauge the ultimate market outcome for the initiating firms as well as all its competitors. They applied the technique to an exemplary class of drugs: statins.
What the Authors Found
The authors found that predictions from the new method have high face validity: If the market leader were to shrink its sales force significantly, all competitors would follow and lower their detailing. The respective drug sales would shrink a little, but not much, and profits for all firms would increase substantially! This finding convincingly shows that the level of detailing in the market is too high – as is typical of many arms races in general – and that all competitors would be better off if they could “de-escalate the troops.” In pharmaceuticals, a healthy by-product would be that the freed-up resources – cash and people – could be allocated to research and development activities to find new medical therapies. Alternative allocations such as this would likely lead to not only more firm profits but also longer, higher-quality lives for patients.
Afterthought
Based on these findings, the question arises why pharmaceutical firms do not substantially decrease their sales forces. There could be various reasons—some rational, some irrational. A rational explanation is the so-called prisoner’s dilemma, in which firms simply mimic each other’s behavior and increase their sales forces. Based on discussions with pharmaceutical managers, the authors also found that fear is a factor: Managers are afraid to implement changes that have not been observed in the past. An irrational reason would be overconfidence: Even though academic literature shows that doctors are not as responsive to sales calls as is commonly believed, firms continue to use the “more sales reps = higher sales” strategy.
Finally, what is so special about this study? It is the first time that researchers have combined historical data on doctors’ prescriptions in response to detailing with experimental data on how firms would respond to marketing policy changes that have not been observed in the past. This is a big breakthrough in data enrichment methods, which originally were used to study consumers’ shopping behavior. This new method provides better answers to what-if questions, especially if this question is quite radical.
Eelco Kappe is Assistant Professor of Marketing, Smeal College of Business, Pennsylvania State University.
Sriram Venkataraman is Associate Professor of Marketing, Kenan-Flagler Business School, University of North Carolina at Chapel Hill.
Stefan Stremersch is Chaired Professor of Marketing and Desiderius Erasmus Distinguished Chair of Economics, Erasmus University, the Netherlands; and Professor of Marketing, Universidad de Navarra, Spain.