A Product Market Fit Show | Startup Podcast for Founders
00:08:39 · Pablo Srugo, AJ Loiacono
[00:08:39] S1: It's wild that that became standard. I mean, that's like the real estate agent who only shows you the houses that they're also, you know, representing the other side of. It's like, okay, show me one of those, but you know, big, big like disclaimer, right? Because it's not clearly the conflict is is front and center. [00:08:53] S0: Well, that was exactly it. And so we started as this scrappy company, Capital Rx, and the concept was very simple. We charge a flat fee, everyone gets the same price. Now, this is like people are gonna be like, wait, what do you mean by this? Believe it or not, drug prices are all over the place. You know, so if a traditional pharmacy benefit manager, someone we compete with, they'll have hundreds of different prices for the same drug, same day, same pharmacy for different customers. And this is what I observed over my career. So I came from pharmaceutical manufacturing. So think of it as kind of if you come from the sell side on some level, like, hey, I'm a pharmaceutical manufacturer and I manufacture this product. And then I move over to the buy side, which is the insurance, if you will, or the administrative side. You would think that these prices would be very tightly correlated. There wouldn't be a lot of variance. But what I discovered made no sense. So on the manufacturing side, we change price twice a year. You could set a clock to it, January and July. I talk about this all the time. [00:10:02] S1: And why you you change prices like each year, they just go up, sort of thing, or you change them for a specific.
00:10:02 · Pablo Srugo, AJ Loiacono
[00:10:02] S1: And why you you change prices like each year, they just go up, sort of thing, or you change them for a specific. [00:10:07] S0: So the way that manufacturing works is you normally in the United States, you escalate the price. And the reason why the defense of the pharmaceutical industry is you have a short patent life before your patent expires. And you've put maybe billions of dollars of RD. So you have a finite window before your product goes generic. So typically it's stepping up. Some of the inflation is natural. It's just general inflation of cost of goods, marketing, market access. But some of it is driven by the very system I'm describing because the people that are on what I call the buy side, the insurance, are increasing price because they're creating what I would say games around how people access medication. And these are called things like formularies. These are games around market access, and we could talk about that more. But but the really the essence of it was I came from a world in which pricing was very static. You would know in January there's a price increase of 5%, and there'll be another 5% increase in July. But now I'm looking at prices on the insurance side, and you've got 600 prices in one quarter. [00:11:26] S1: I don't want to get too into the weeds, but just a simple example of why would they charge so many different prices to different customers? Like what's what's driving that?
00:11:26 · Pablo Srugo, AJ Loiacono
[00:11:26] S1: I don't want to get too into the weeds, but just a simple example of why would they charge so many different prices to different customers? Like what's what's driving that? [00:11:34] S0: Well, this is what I realized is who loves opacity and variability, people that are seeking the highest level of profitability. And so if they were just plain administrators like we are, just charge a flat fee, you would be forcing these prices to become stable and very transparent to all of your customers. But they were doing the opposite. They were putting gag orders, they were making it impossible to get your claims data. They're creating confusion in the market, they're creating unnecessary opacity and complexity. [00:12:10] S1: It's like crazy segmentation, like hyper-segmentation. Every customer is a different book, depending on your need, your budget, your whatever, I charge you what I can, sort of thing.
00:12:18 · AJ Loiacono
[00:12:18] S0: Well, that's exactly it. And, you know, I would say there's some science behind this. So most people, if you are accepting your prescription at the register, you're going to see pickup of like 96%. So think about it. If you're testing how people respond to higher and lower price, if the house knows, in this case the insurance side, that 96% of the time you're just going to take whatever I give you, that's a pretty good number, you know, to work with. And so again, the variability was artificial. This was my big observation. And, you know, the other thing you come to in the gritty days, I can't be the only person that's making this observation. And the reality is other people are, but they're on the payroll of the model. So if someone's like, hey, I'm a consultant or a broker and they get paid on product. You want to know who loves bad product? The person who's getting commission on the product. And so now you're not just up against three giants, you know, CVS Cigna United, but you're also up against all the people on the payroll of CVS Cigna United. And that is deep and wide. And so you become enemy number one because you're basically calling out the insurance industry for what it is. Uh highly opaque, you know, what I would say overly complex profit-seeking entity. And you're also going after the people that represent the companies that you want to move over. And you're saying, I'm calling people out. And I always want to be fair with this statement. The smaller the employer group, usually the shadier the broker. And what I mean by this is they're going to be like, I'm going to get paid on everything and anything. The larger the client, you start to see, I would say, some professional behavior here and some more disclosures around compensation. But the point of it is we had to fight against everyone, back to hand-to-hand combat, fix bayonets here. And because everybody in my mind was rotten.
00:14:36 · Pablo Srugo
[00:14:36] S1: This is kind of like classic, you know, counterpositioning, if you want to look at it that way. Everybody's making money a certain way on a certain business model. You're going to go and deliver a similar product, maybe a better product, but in a completely different business model that, you know, is more aligned. But because of the setup, you know, sometimes you get lucky where it's kind of like the big guys just ignore you, like, ah, yeah, let them let them do that. You know, the Netflix example being the obvious one. You know, let them run DVDs, whatever. But in your case, probably not. I mean, how do you get started? Where do you go? Because I'm thinking to convince the buyers is probably not easy, to convince the VCs is probably not easy. I mean, you have a track record, so maybe that helps. But, anyways, how do you get started on something like this?
00:15:12 · AJ Loiacono
[00:15:12] S0: Yeah, you bootstrap. I'm going to use the honest one. And I want to be fair. Health technology was starting to become interesting, you know, 2016, 2017. So there was a market there, but pharmacy benefits was observed to be this impossible fortress to get through because it was dominated by three massive players. And no one had really had commercial success kind of overturning them. And what I mean by that is there have certainly been other pharmacy benefit managers, but they replicated the model. They did the same exact thing as the leaders in the market segment, and they grew to a certain point, and then they flatlined. No one had ever scaled and started to take money from what I would call the two most valuable categories are Fortune 500 because they're large and prestigious. The second being health plans, because they're even bigger than Fortune 500 customers. So if you could service a health plan on the benefit and technology side, that's a huge deal. But no one had been able to do it. So, how do you get started? We bootstrapped. And when you bootstrap, you might have this vision of this powerful platform that's going to process claims and administrate patients and workflows. But you're going to start with a small build and you're going to license third-party software. You're not going to be thrilled with what you're given. You're going to have to rely upon third parties, you're going to have to license a network, you're going to have to work with other vendors, and you're not going to have a great product. But you have to be willing to make some concessions, stay true to your principles, and understand if we do this correctly and we're able to scrap our way through these first couple of years, we'll start to build the platform we envision. We'll have the opportunity to contract directly with pharmacies and other providers. And that's exactly what we did. But, you know, it's bootstrapping. And then in our second year, we did our Series A. So we finally felt with kind of the product market fit moment of that end of the second year where we had this inbound call from a prestigious customer. We felt like we had something that we could show. The growth, the model was working, and that if someone would give us the money, we could scale it to be the organization we are today.