Is your veterinary practice’s pricing strategy holding you back?

July 17, 2020
Matthew Salois, PhD
Matthew Salois, PhD

Dr. Matthew Salois worked in private industry, government and academia before joining the AVMA in 2018 as director of veterinary economics. From 2016 to 2018, he served as director of global scientific affairs and policy at Elanco Animal Health, supervising a team of scientists in veterinary medicine, human medicine, animal welfare, economics and sustainability. Before joining Elanco, Dr. Salois was chief economist with the Florida Department of Citrus, where he led economic and market research activities to drive industry growth and profitability for citrus growers. He previously served as an assistant professor at the University of Reading in the U.K., and also has held positions with the University of Florida and University of Central Florida. Dr. Salois earned his PhD in Food and Resource Economics from the University of Florida, and holds an MA in Applied Economics and a BS in Health Services Administration from the University of Central Florida.

Your hospital’s strategy doesn’t only determine whether you recoup costs and turn a profit. It can be a critical factor in helping clients make smart decisions about their pets’ care.

From research done for our Pet Demographic and Ownership Sourcebook, we know that nearly one-third of pets don’t see a veterinarian even once a year. Meanwhile, 60% of veterinary practices aren’t operating efficiently. Taken together, these data tell us that the lack of widespread effective pricing strategies is inhibiting us from being a more successful and thriving profession overall.

Economics 101

To understand why this is, let’s go back to Economics 101 for a moment. The classic formula is that total revenue equals price times quantity. Let’s use that as a lens through which to view the veterinary profession.

Pet Demographic and Ownership Sourcebook data show that total veterinary expenditures across the U.S. as a whole are growing, but slowing. Meanwhile, the number of total veterinary visits is flattening or falling. The only way total revenue can increase when quantity falls is to have rising prices. Veterinary prices are rising fast, currently at a rate twice that of the U.S. Consumer Price Index.

We also know that price is a main reason why that one-third of pets — nearly 50 million animals — don’t see a veterinarian at least annually. Among those owners whose pets don’t receive regular care, 25% say they can’t afford veterinary services and more than 50% don’t see the value in regular veterinary care. That means we as a profession need to do more to help our clients understand the value of the care we provide to their pets. In fact, we must ensure that the value of our services far exceeds the price we charge, and help our clients understand why.

Cost vs. value

According to the Veterinary Hospital Managers Association, about 40% of veterinarians set prices based on how much a service costs them to provide. Even more striking: About 80% use this approach to price the products they sell.

This method hurts our practices by artificially limiting the value propositions we present to clients. It fails because clients don’t care about the veterinarian’s costs; they care about the value of the services and products they receive. Clients want to feel they’re receiving top value, yet cost-based pricing does nothing to demonstrate or enhance your value in your clients’ minds.

There is a better way

A better approach for veterinary practices is value-based pricing. Rather than basing price on the cost of a product or service, this strategy sets prices primarily according to the perceived or estimated value of that product or service to the customer. The Harvard Business Review (HBR) offers a quick guide to value-based pricing that we can easily adapt to the veterinary market. It boils down to four tactics:

  • Focus on a single market segment. This means you must identify who your clients and potential clients are. HBR uses the example of a brand that focuses only on big-screen TV buyers, not all TV buyers. The more specific you can be, the better.
  • Compare your offerings with those of your main competitor. Ask yourself which veterinary practice your clients would choose if your practice wasn’t an option. Focusing on the “next best” helps you zero in on the true point of comparison.
  • Understand what makes you different. Identify what makes your practice unique in your area. Those special features are what differentiate you from your competitors.
  • Place a dollar amount on those differentiators. This is the most challenging part, and it may take some trial and error to hit on your sweet spot. For example, if you decide to offer complementary nail trims with all well-pet visits, and your competitors don’t, you must decide how much this convenience is worth to your clients, and then build it into your exam fees.

Bundled and preferred pricing

In addition to value-based pricing, practices also should consider experimenting with bundled and preferred pricing. Both can help enhance your perceived value among clients.

In bundled pricing, several products or services are combined and sold as a group for a reduced price, such as when wireless carriers bundle a new phone purchase with a data package. Despite the fact that the items are sold at discounted prices, bundled pricing can boost overall revenue — and pet health — by encouraging clients to expand the care you provide to their pets. One example might be to offer a reduced price on a dental service with the purchase of a wellness plan.

Similarly, preferred pricing addresses the human desire to save money, which people will actually sometimes pay a premium to achieve (think Amazon Prime). With preferred pricing, the purchaser may receive a discount as a reward for previous purchases or an incentive for later ones. In the veterinary setting, practices often offer promotional deals on vaccines to existing clients.

Resources to help with pricing decisions

The AVMA offers tools and information you can use to help refine your practice’s pricing strategy. Our market share estimator, for example, provides a step-by-step process to calculate the potential size of your local market, identify current market share, and set realistic goals for growth. Having these data at your fingertips is crucial when making pricing decisions. The AVMA Direct Connect purchasing tool, also a free member benefit, lets you see real-time pricing at consumer pharmacies so you can know what your clients pay for medications at direct-to-consumer pharmacies.

You also can find important insights into what services pet owners value in the Pet Demographic and Ownership Sourcebook, which was recently made available to the entire profession free of charge to support practices during the COVID-19 pandemic. In addition, our upcoming AVMA Economic Summit in October will include a session devoted exclusively to pricing strategy.

Matthew Salois, PhD, is chief economist and director of the Veterinary Economics Division at the AVMA.