The Veterinary Hospital Managers Association flexed its leadership biceps in August by hosting the Critical Issues Summit, a two-day workshop on value-based pricing. Leading the discussion was Utpal Dholakia, MS, Ph.D., a Rice University marketing professor and the author of “How to Price Effectively.”
Dr. Dholakia recommends shifting the focus away from cost when determining a price and instead zeroing in on the emotional impact of a service, its reference pricing and the qualities that make the service unique in the marketplace.
Working in small groups, the 40 attendees — veterinarians, consultants and other industry professionals — formulated ideas for a white paper on best practices for pricing veterinary services and products.
Among the key takeaways:
- Veterinary practices probably rely too heavily on cost-plus pricing when determining fee schedules, a strategy that can lead to bloated invoices and tepid client compliance.
- Discounts, promotions and bundles are effective tools to drive sales but are likely mismanaged at most practices.
- Effective pricing requires significant thought, specificity, research, follow-through and measurement, a time investment that could challenge the average practice leader.
Cost-Plus Pricing Versus Value Pricing
Most veterinary practices use a cost-plus strategy to determine prices. The formula — cost plus desired profit equals price — seems straightforward enough, but what should be included in the cost portion of the calculation? For example, the direct, or incremental, costs of an add-on in-house wellness lab test are obvious: the syringe, needle and rotor to run the test. But what about the cost of the blood machine, labor costs, facility costs and even the costs of ordering, stocking and handling the materials? Dr. Dholakia argues that the latter, these background costs —he refers to them as fixed or irrelevant costs —are covered by the core sales of the business and should not be taken into consideration when pricing the add-on item.
That’s a big deal. Let’s say your practice provides patients with an annual exam, vaccines and parasite check. As part of the standard of care, you offer a wellness profile. Dr. Dholakia believes that including facility and other fixed costs in the calculation of the lab price is unnecessary since they are accounted for in the price of the exam, vaccines and parasite check.
By basing the price on the incremental costs and omitting the fixed costs, the hospital can create a price that is appealing to pet owners and profitable to the practice.
This idea was met with a fair share of raised eyebrows, especially by attendees who regularly analyze practice pricing. Many hospitals price their core services as loss leaders with the idea that clients will be offered additional, more profitable services like laboratory tests. In practices like these, Dr. Dholakia’s incremental cost-only methodology can’t work, but for those hospitals whose core services are profitable, he believes that add-on services, priced as incremental costs plus margin, will generate affordable prices that both promote sales and increase profit.
Value Pricing Framework
However, the cornerstone of Dr. Dholakia’s pricing strategy is that prices should include a service or product’s value to the client, not just its variable and fixed expense. He argues that pricing exists in a framework supported by four pillars:
- The costs of the service. These determine the minimum price a practice must charge.
- The emotional benefits of the service. These determine the highest price that clients will pay.
- The price that competitors charge for the same service. These provide the client with a point of reference and an expectation of what is reasonable.
- The value proposition. This is the case the practice makes for how its service distinguishes itself from all others.
Within this framework, pricing is less a formula and more of a matrix in which all these variables are weighed, given value, priced and then tested for profitability. In a Dholakian world, prices are rarely static. Rather, they are dialed up and sometimes down again, bundled, promoted or tiered as the variables within the framework, especially the service’s value to the client, are measured and considered.
The idea that the best veterinary pricing might be dynamic rather than static caused a good deal of audience consternation. How can veterinary practices be expected to pay close attention to value, cost, profit and reference pricing, and then adjust prices regularly? The answer never surfaced, but it was clear that even in the absence of a solution, the Dholakian equation for pricing warranted additional investigation.
Why? Because examples of Dr. Dholakia’s position abound. Airlines, hotels, restaurants and, yes, even some veterinary practices base fee schedules on what time a service is offered, which competitor they want to challenge, which audience segment is purchasing the service, and whether they need to increase or decrease the amount of business being done in a given time period. Everyone agreed that Dr. Dholakia’s recommendations might be a pain to pull off, but they also agreed that it might be a pain that pays out.
Discounts, Bundles and Promotions
A significant portion of audience discussion orbited around Dr. Dholakia’s notion that discounts, bundles and promotions could be designed to increase revenue, not lose it, and serve to better bond clients to the business.
If add-on services were priced using only incremental costs, they could be priced low, still be profitable, appeal to clients and increase compliance with important health care services. “Good,” “better” and “best” bundles could be promoted selectively depending on client need and not indiscriminately offered to everyone like a menu at a diner. Veterinary teams could be trained to illuminate the benefits of a service rather than its features.
For example, instead of explaining the features of a presurgical package price —exam, catheter and preanesthetic drugs —the team could be coached to stress the benefits, such as precision, safety and pain management, because, as Dr. Dholakia argues, features can always be low balled.
MasterCard employed an example of this strategy to great success in the ’90s with its “priceless” commercials. In one, a father and son are sitting side by side at a ball game. As they laugh, eat and share quality time, a voiceover announces these “feature” costs and then the “benefit” cost:
- Two tickets: $46
- Two hot dogs, large popcorn and two sodas: $27
- One autographed baseball: $50
- Real conversation with your 11-year-old son: priceless
For all we know, dad might have ended up in debtor prison by using his credit card to rack up all those “priceless” days with his son, but the financial benefits to MasterCard were, and continue to be, record-breaking.
Implementation Strategy
Attendees agreed that managing a dynamic approach to pricing would be a departure for practices used to an easier, straightforward approach like across-the-board markup. To help leaders navigate this newer, arguably more complicated undertaking, they offered three potential starting points.
1. Include the Price for Yourself in the Price on the Shelf
There was near universal agreement that great pricing has to live inside the bigger context of what your practice is and what you want to achieve. Your services’ emotional benefits, rather than their features, should be used to acid-test the hospital mission and ensure that you are not just selling goods but also “feel goods.”
2. Survey How Your Clients Feel About Your Practice’s Benefits
Armed with the knowledge of what clients love most about you, decide if these powerful motivators are evident within your services. Bundle services with other items that cement client confidence that your business satisfies both needs and desires.
3. Tip-Toe Into Price Change by Focusing on One Service or Package
Separate the service or package and assign a value to each benefit. From there, build a new price and test it. After a month, check with team members, review sales and gauge your success. Don’t be afraid to adjust pricing. Tinkering is not only allowed, it’s essential to success.
What’s next
Dr. Utpal Dholakia will deliver a white paper based on the discussions that took place at the Critical Issues Summit. The presentation will take place at the Veterinary Hospital Managers Association annual conference, set for Oct. 18 to 20, 2018, in Baltimore. More information is available at http://bit.ly/2P0w6KA.