A veterinarian's master class on pricing

Pricing strategies aren't what they used to be, but you already knew that, right? Old formulas for pricing are falling apart with increased competition for products, drugs and services outside our hospitals. Let's face it: Today's pet­owning consumer is savvier about price and hospitals need to take that into account. You'll find my three general pieces of pricing advice on this page. For more specific advice for every sector of your veterinary practice, head to page 2 and later. 

Automate your pricing

You can hire a number of companies out there to use cost accounting software to determine your prices. This takes us away from just using historical pricing (“What did we charge last year? Add a little more!”) or the voodoo guessing game (“Throw this dart at the board with prices on it”).

Because looking at all the items and services in a practice is mind­boggling, start-up practices especially would benefit from these pricing services. For established practices, I would argue for the merits of historical prices that clients accept and are used to. The goal is, of course, to find services or products that are underpriced.

Wouldn't you pay $10,000 to evaluate your pricing if that could get you an additional $20,000 profit?

Price­match, but be smart about it

At my clinic, we aim to price competitively, but we will never be the cheapest. For good clients-and we tell them so-we politely price match major online pharmacies. The reality is, you can sell many of these products to pet owners once or twice if you employ traditional pricing before they go shopping elsewhere, or you can adopt the view that selling them for less on a frequent basis makes more dollars and sense.

My personal view is, you should take advantage of these business opportunities, but to do so you need to understand your clients' buying habits. If you want the retail business, you need to be competitive and modify your pricing for these select products, which likely only account for 10 to 15 percent of your product sales. Our goal is always to get pets the medications to keep them healthy and comfortable.

We just have find ways to make that do­able for clients. You'll notice that clients' buying habits will change with changes in pricing. Price elasticity exists.

Sort prices by category

If you're going to evaluate prices yourself, break them into groups to make it easier. For example, start with inventory on the next page ...

Inventory

You know what you paid for these items, so in theory they're easier to price. Formulas are helpful, but you can quickly find exceptions.

Annual price hikes: Yea or nay?

You should raise prices at least annually, but the days of automatic, formulaic increases every time are over –you really have to look at what the market will bear, what the competition is doing and what price increases you're facing. For cost-based items, increase your prices as product costs increase. Most vendors have annual increases, which magically fall into the 5 percent range. That's a good hint that we should increase prices as well-if only to keep up with inflation.

Keep in mind that a five percent increase on a $2 vaccine is 10 cents, but if we increase our $25 vaccine 5 percent, that's $1.25. I think some of our clients experience sticker shock when, thanks to 10 years of 5 to 10 percent increases across the board, our prices have doubled in that time frame. To avoid sticker shock and to feel more confident about increases you make, increase prices by category, not with a blanket markup on everything. At my clinics, many of our services have only increased 2 to 3 percent every year in the past three to five years. In some cases no annual increase is warranted because we already see too few willing clients for that product or service at the current price.

• Most medications. In this era of greater pharmacy competition, can you still mark up medications two or two-and-a-half times the cost and apply a prescription fee or handling fee?

For the majority of prescription medications, that traditional markup is acceptable and needed in order for your pharmacy to be a profit center. After all, there's a lot of expense and overhead to maintain a pharmacy. Exceptions would be for comparatively expensive medications, which sometimes occur for larger-size animals. (You might have a 150% markup on a smaller-sized NSAID, but only a 100% markup on the larger size. Chronic-use medications and preventives typically deviate from this rule.

• Over-the-counter products. Do you carry diphenhydramine (Benadryl), famotidine (Pepcid) or loperamide (Imodium), or do you just send clients to the drug store because you think they'll get mad if they pay a premium price at your clinic?

I think those are important medications to have in-house for better client compliance and convenience, but be proactive in your pricing and make them comparable to the drug store. These medications usually cost very little and can be sold easily with a markup. I recommend either a) two to two-and-a-half times the cost or b) setting a minimum price per pill and including a handling fee. On such an easy prescription, that handling fee might be just in the $5 to $7 range vs. a larger pharmacy fee, which could be twice that.

At my clinic, we also offer more variety and convenient sizing options for some of these medications than are available in the drug store.

• Preventives and chronic-use medications. These medications don't allow for standard markup rules. But lowering your markup doesn't equate to swallowing your pride. Making some profit off of these is better than nothing. When we're the ones spending the time to educate clients on these medications, it makes sense that we benefit from their sale. The client and pet also benefit when we have accurate records of what they're consuming.

Takeaways:

• Traditional prescription medications (Prescription fee + two to two-and-a-half times cost)

• Over-the-counter items, such as shampoos, ear cleaners, medications or supplements (Two to three times the cost, with a minimum cost or a handling fee on over-the-counter medications)

• Repeat products (One-and-a-half to two times cost, with price matching in certain cases)

• Food (MSRP)

• Vaccines (Check your historical pricing and the market)

A practice owner, a practice manager or an enterprising inventory-managing team member should monitor what major online pharmacies are charging and work to keep your pricing competitive. Pet foods, a frequent purchase, yield about a 40 percent markup. Heartworm and flea and tick preventives are in the 75 percent range. Even at these ranges, you can make an acceptable profit margin, because these aren't cheap and they're bought frequently or in bulk.

We all know that pet stores and online pharmacies are very savvy about charging what the market will bear, with food getting a 40 percent markup and other items getting a 500 to 600 percent markup.

Laboratory

Because these services have a cost basis (if you use outside testing or outside analysis), use a formula. But remember that historical prices at your clinic may override the formula.

Be smart lowering prices

Should you ever lower prices? Prevailing wisdom says no, but I don't think it's a hard-and-fast rule.

For example, let's look at glucosamine supplements. I can price ours at $50 to $75 per month and sell a few bottles a month, but I may be better off selling them at $40 to $45. I may make $15 per bottle and sell 20 every month, generating more profit than selling five with a $25 dollar profit per bottle. Be smart about it. It may not make sense to lower your ear medication by $5 when the price goes down, because you sell it easily at the current price with few complaints.

Pricing products and services is a big job, but it's worth your focus. It has a big impact on yearly profit, which has a big impact on the value of your practice. If you're overwhelmed by pricing or don't enjoy it, turn it over to a pricing service or consultant. But, most of all, be open to changing your pricing philosophy over time. The marketplace changes, pet owners change, competitor's change-so should you.

At my practice, two exceptions are fecals and heartworm tests. As a general rule of thumb, typical lab markup is two to two-and-a-half times the cost of the service. Remember, though, that if your lab services are too pricey, clients may decline tests you recommend.

When I found out that clients were declining our urine culture and sensitivities testing at our normal markup, I lowered the price from $130 to $99. Suddenly, we were performing more tests. My associates also appreciated the discount and are now even more aggressive in recommending the test when needed.

Eyeball your services and consider cutting the markup on services you feel are important to run on a frequent basis (for diagnostic benefit), but aren't being performed often.

Takeaway:

• Laboratory services (Two to two-and-a-half times the cost of list price + blood drawing fee + cystocentesis, if needed)

Remember that some of your prices on lab services (like heartworm tests and fecals for my practice) are based on a historical basis. For example, a heartworm test may cost you $3 to $5, but not a lot of us are charging as little as $10 to $15. The same holds true for fecals.

Keep in mind that some services-for example, physical examinations, neuters and spays and phone consults-are often loss leaders. We undercharge for these, and other items increase a bit more than normal each year and it balances out.

Non-lab services

These are your time- and knowledge-based services, ranging from different levels of ear cleanings to surgical and procedure time for doctors, technicians and/or assistants. While I advocate (on the previous pages) for being competitive on retail items and inventory, when it comes to medical knowledge and surgical or dentistry skills, I don't recommend giving the shop away. This is where the bulk of your profit should be coming from-if you undersell yourself, you'll be working harder, not smarter.

When history plays a part in service pricing

There are, of course, lots of services in the “treatment” category with historical pricing: nail trims, anal gland expressions, ear cytologies, heartworm tests, stool samples and more. These prices have developed over time at your practice and typically get increased a little each year.

Where did the original price come from? Maybe the practice owner copied what was charged at the clinic they used to work at. Maybe someone heard a number at a practice management CE session. Today, clients at your practice are used to certain prices, so it fits into your pricing mix. If the price for these services starts to get out of line with the marketplace, you can always avoid increases-or increase them if they're low.

One example of pricing for knowledge-based service is a per-minute fee. If a reasonable amount of revenue to generate for an eight-hour doctor shift is $2,400, a doctor generates $300 an hour or $5 a minute. You can then use this for your fee per minute for doctor professional services or procedure time.

This would also apply to things such as repairing a torn toenail or infusing or flushing out an abscessed anal gland. In those cases, I make sure to add in a clipping or scrubbing fee and to account for my technician and assistant time. It's crucial to charge for your team's time, as they often get involved in performing many services for us. For surgery I charge a premium, which is closer to $7 per minute, and higher for orthopedics and emergency surgery.

My per-minute charge for a technician is based on their average hourly wage. If the average wage is $15 an hour and my staff wages account for 20 percent of my revenue, I then work backward to determine that my technician needs to generate $75 an hour to cover their cost. Based on this we charge $1.25 per minute for their time. I make a similar calculation for assistant time. It's not really any different than the attorney billing you for the legal assistant's time, which is a lot less than the attorney's time.

Charging appropriately for team members' time shows them they're valued and answers the question, in no uncertain terms, of how much they're worth to the bottom line. (The answer is: a lot).

Takeaways:

• Services (charge based on time and skill) 

• Orthopedic or emergency surgery (add $1 to 3 per-minute premium charge)

• Oral surgery (same per-minute charge as soft-tissue surgery; may apply per-tooth minimum)

• Competitive or promotional pricing (spays, neuters and dental prophylaxes only)

All this to say, I don't advocate for a set price for most procedures or surgery. We base it on the time the doctor and team spends treating the pet.

It's worth mentioning that fee schedules and fee comparisons exist from places like the American Animal Hospital Association and in Benchmarks: A Study of Well-Managed Practices from Veterinary Economics and Wutchiett Tumblin and Associates. These can be valuable resources for other practices' fee ranges. These all fall into the historical category. Practice prices surveyed for these books have evolved over time and tend to be generally acceptable and appear to fit with a practice being profitable. They're helpful in that they give a broad-spectrum overview and eliminate the specter of price fixing that might occur if compiled by a group of local practices.

Veterinary Economics Editorial Advisory Board member Dr. Jeff Rothstein, MBA, is president of the Progressive Pet Animal Hospitals and Management Group in Michigan.