The big truths about veterinary practice pricing structures

Determining prices can be scary or boring or hard, but strategic pricing is crucial. (Denis/stock.adobe.com)Editor's note: This data and information is all excerpted and paraphrased from “Value-Based Strategic Pricing for Veterinary Practices: Findings From the 2018 VHMA Critical Issues Summit" at https://www.vhma.org/store/ViewProduct.aspx?id=13025952. That report includes concepts, framework and content about pricing adapted from the book How to Price Effectively: A Guide for Managers and Entrepreneurs by Utpal Dholakia, PhD, the George R. Brown Professor of Marketing at the Jesse H. Jones Graduate School of Business at Rice University in Houston, Texas.

A survey last year highlighted how members of the Veterinary Hospital Managers Association say they set prices. As you can see, price-setting strategies today are not ideal.

Practice managers answer, "What's the primary approach your veterinary practice uses in setting service and product prices?"

  Services Products Based on what it

costs

to provide 40% 78% Based on what

most direct competitor

charges 0% 0% Based on what

various competing practices

charge 19% 8% Based on

fee surveys or guides

15% 8% Based on how much you think

clients value

the product or service 5% 2% Based on

instinct or experience

12% 2% Other 9% 6%

Source: VHMA Insiders' Insights           

What do Dr. Dholakia and the more than 40 other thought leaders at the summit think you might be doing wrong? They say you might be giving pricing strategies short shrift if you …

• Put pricing on the backburner because you're intimidated

• Look for a magic bullet, such as a computer program or app that will solve all your pricing problems

• Search for standard, one-size-fits-all solutions you can use without much thinking or effort

• Let your emotions color your decisions about raising prices and not increasing prices, even when your medicine and market justify it

• Give deeper discounts than clients need or ask for, or give discounts without a clear purpose or objective

• Fail to measure the impact of pricing changes on sales, profit margins or customer satisfaction

• Use simple methods like historical pricing*, cost-based pricing**, inherited pricing***, fee-reference pricing**** or pricing slightly below a competitor and leaving money on the table

• Fail at price execution and not getting the asked-for price.

* Prices based on last year's, with a moderate, across-the-board increase to account for inflation.

** Prices based on the organization's costs, typically by applying a certain markup factor.

*** Prices based on how the previous practice owner did things (with whatever 2% or 3% annual increase that previous owner added)

**** Prices based on an industry-wide survey (describing what prices are, not what they should be) that does not account for your practice's market

Now, find out the big profit levers you control in veterinary practice ...

Prices drive your veterinary practice's profits and make it sustainable for the long-term future. And to manage and increase profit, you only control three levers at a veterinary hospital:

1. Sales volume, or revenue earned from all products and services

2. Prices of products and services

3. Costs, some of which are fixed costs and won't change no matter how much you sell (rent and salaries, for instance) and others variable costs that change with the level of activity in your hospital (cost of products sold and consumables used in delivering care).

In mature markets like the ones most veterinary practices operate in, growth rates are relatively small, and it's difficult to grow sales volume quickly or substantially without eroding profit margin. That leaves price and cost. You can't ignore the areas in which cost-cutting can be made, but strategic pricing often represents the area of the greatest opportunity for veterinary practices to influence profit. Best of all, you don't need to increase prices by large numbers or percentages to benefit.

Unfortunately, most practices use unstructured or ad hoc methods for pricing. Many tend to be satisfied because of the belief that they're earning a sufficient profit.

Ready for a deeper dive, covering the four pillars of pricing (costs, customer value, reference prices and your value proposition) as well as ways to calculate those numbers and get tips from experts on how to change them? Pick the manager in your veterinary hospital most excited about finding more money and serving more clients better (might be your Certified Veterinary Practice Manager) to check out the book and download the free whitepaper, “Value-Based Strategic Pricing for Veterinary Practices" at https://www.vhma.org/store/ViewProduct.aspx?id=13025952.