Monday, November 10, 2008

Fewer Sales Reps Lead to Higher Costs

We all know about pharmaceutical sales reps being laid (off, that is). Like you, I assumed that these layoffs would save pharmaceutical companies oodles of money. It turns out, however, that while the number of sales reps has declined in recent years, the drug industry may actually be spending more money than before to maintain fewer reps in the field!

How is this possible?

Simple. The increase in sales rep compensation more than offset the savings from laying off reps. It seems like lower-paid, under-performing reps are first to go.

Here's the data:

A short while ago, I reported that the average pharmaceutical sales rep earned $94,200 in total compensation in 2007, compared with $87,500 in 2006. This was an estimate made by the National Association of Pharmaceutical Sales Representatives (see "'Friendly' Pharma Sales Reps Earn More Bucks with Fewer Sales Calls!").

In the November, 2008 issue of MM&M I found a chart in an article on closed-loop marketing that quantifies the recent decline of pharmaceutical sales reps (see below).

Between 2007 and 2006, the number of sales reps in the pharmaceutical industry decreased by 3.7%. In contrast, the total average compensation for reps increased by 7.1% during that period (cf: the 2007 inflation rate in the US was 3.2%). That means that 94,308 reps in 2007 were compensated $8.883 bn in total whereas 97,963 reps in 2006 were compensated $8.572 bn. In other words, the total compensation increased 3.6% while the number of reps decreased by 3.7%!

As I pointed out in the post cited above, reps are making 11% LESS details while getting 7.1% higher compensation! No wonder the drug industry is looking to technology like closed-loop marketing (see Pharma Marketing News reprint #73-04).

Speaking of details, a table in the MM&M article cited above reported that the total number of pharma details in 2008 was 92.93 million (see chart below for # of details of the top 10 pharma companies).

A question I'm often asked is How much does a sales rep call cost?

Let's say that in 2007, the total number of details was 104.4 million (assuming details decreased by 11% between 2007 and 2008 just as they did between 2007 and 2006). Reps were compensated $8.883 bn for these 104 million details. That's $85 per detail. If the average rep makes between 2 and 3 details per call, then the labor cost per call is $170-$255. This estimate does not include non-labor costs like cars, gas, and other sales expenses (including free lunches for physicians), etc.

Over at Pharma Marketing Forums, I once tried to get an estimate of the total cost of a sales rep call (see "What Is Average Cost of Sales Call?"). A poll of readers of that discussion thread suggested the cost was somewhere between $201 and $500 per rep sales call.

I welcome feedback from readers on my math.

1 comment:

  1. Anonymous6:25 AM

    As a former pharmaceutical executive (33 years of service) who worked as a rep early on and wound up in corporate strategy/business development before retiring, this is an interesting and very important question. First, one needs to look at the totality of rep compensation, not just direct pay. By the time you factor in benefits and the company car, the annual cost of that rep will probably exceed $150,000 per annum.

    A working year is probably about 220 days depending upon how much off-territory time (vacations, meetings, sick days, etc.) is allowed.

    The real variable is the number of calls per day. While companies may expect some number like 7-8-9 physician calls a day,many If not most) of those will be "hi and wave" or "sign here for the samples" visits. The average call length in the US is approaching one minute and will probably drop to 30 seconds within the next few years. Under the increasingly hostile environmental circumstances a representative will be lucky to be able to deliver more than one or two calls that actually classify as selling in a given day.

    If one counts the total of all "declared" calls, the productivity of a rep might be somewhere in the range of 1,700-1.800 calls per day. If, on the other hand, one takes a more conservative assumption about calls that actually carry some sort of selling message, the number is probably well under 1,000 and might be as low as 500-600.

    Bottom line, the cost of call probably ranges between $90 (low side) and $300 (high side). The truth probably lies somewhere in the middle.

    Is it any wonder the industry is starting to understand that reps are a big fixed cost investment with a rapidly declining ROI?


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