Does the following scenario sound familiar? Dr. Smith reaches for her go-to NSAID on the shelf of the pharmacy and found the space empty. She does a quick look toward the clinic back door and sees the UPS driver left a few boxes lined against the wall. She asks her technician to check the boxes for the missing NSAID. Sure enough it’s there, and she quickly begins to dispense the correct number of pills. While entering the transaction in her inventory software, Dr. Smith happens to check her packing list against the cost of the drug shown in the system. To her disappointment, she sees the price of the drug increased 5% over the past month and no one made a change to the client charge in the billing system. So, in effect she has been losing 5% margin for a month now. The client is waiting in the exam room and the next appointment is already running 15 minutes behind. She quickly applies the customary 2X prescription drug markup, prints the label, slaps it on the dispensing bottle and moves on with her day.
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Veterinarians and office managers have doubled (2X) the cost of drugs and goods as a rule for decades now. Do you do the same in your practice? Some exceptions to the 2X markup are drugs and goods that are heavily shopped, like flea and heartworm products, and more “expensive” drugs — in these cases the markup usually drops to 1.5X. Again, does this sound familiar? Have you ever stopped and asked if this is really a good pricing strategy, and can we do better? Veterinarians should move away from thinking in terms of “markup” and instead focus on “margin dollars” or “profit” in setting pricing. The desired gross margin should drive your markup, not the other way around.
Focusing on margin vs. traditionally employed markups with your pharmacy inventory may increase your clinic’s revenue and profit margins.
Some definitions:
Markup is the ratio between the cost of a good or service and its selling price (client charge). Markup is expressed as a percentage over the cost:
Sell Price of Drugx to Client – DVM’s Cost of Drugx
DVM’s Cost of Drugx
Gross Margin is the difference between the selling price and the cost of goods sold, divided by the selling price, expressed as a percentage. Gross profit is the difference between revenue and the cost of goods sold, expressed in dollars.
Sell Price of Drugx to Client – DVM’s Cost of Drugx
Sell Price of Drugx to Client
Note: Selling Price = Client Charge = Revenue
The following sample calculation of markup and gross margin for an FDA- approved generic drug helps explain the difference:
- DVM’s drug cost for Loxicom® (meloxicam oral suspension) 1.5mg/mL – 32mL = $25 (rounded to nearest $)
- DVMs drug charge to the client = $50
Markup = ($50 – $25) / $25 = 1.00 or 100%
Margin = ($50 – $25) / $50 = 0.50 or 50%
To illustrate this markup vs. margin point further and using FDA-approved generics to help you increase your revenues, see the two scenarios below. FDA-approved generics have proven to be “bioequivalent” to the pioneer, reference drug. This means the generic will perform equally as well as the pioneer in the pet. In the first scenario I utilize the traditionally employed 2X markup to the list prices of the pioneer brand meloxicam oral suspension 32mL and the generic brand meloxicam oral suspension 32mL. In Scenario 1, prescribing the generic Loxicom® would make your clients very happy, however, you would lose $14 ($39 – $25 = $14) for every generic bottle you sold vs. the pioneer brand, Metacam® (meloxicam oral suspension) 1.5mg/mL – 32mL. Obviously, this is not a win-win situation.
In Scenario 2 we get to a win-win for both the clinic and the client. With the 2X markup, this clinic was making $39 in margin dollars per 32mL sold. Let’s assume the clinic calculated $48 margin dollars would help them cover their overhead expenses and provide more profit to the clinic. Applying the $48 to the cost of the Loxicom® Oral Suspension 32mL ($48 + $25 = $73) now puts the client charge at $73. $73 would save your client $5 versus Metacam® Oral Suspension 32mL at 2X markup and net the clinic ($48 – $39 = $9) more margin per 32mL bottle sold.
A 32mL bottle will treat an average sized (35-45 lbs.) dog for 24 to 30 days. By switching to this margin pricing of $73 per 32mL bottle, the clinic can realize this additional $9 in profit X all the dogs on generic meloxicam oral suspension in the practice X 12 months in a year.
Those profit dollars start to add up very quickly! Imagine doing this same exercise with other NSAIDs you carry, flea and heartworm products, commonly prescribed antibiotics and other fast-moving drugs.
Tip: Start with the top-25 movers in your pharmacy to see if there are FDA-approved generic alternatives available and start applying margin pricing.
Another benefit of stocking FDA-approved generic pharmaceuticals and utilizing targeted, well-thought-out margins can better position your clinic to compete against online and human retail pharmacies. Millennials have surpassed Baby Boomers as your largest potential client demographic. You can be certain that as soon as you quote or prescribe a Millennial an Rx drug, they are going to whip out their phone and check your pricing against any online entity that sells that brand. Members of every generation are becoming more comfortable with asking for and seeking out generic alternatives to the higher priced pioneer brands. So, if you are not offering FDA-approved generic alternatives to your clients and not giving them an option to the pioneer brands, you may get that first sale but don’t be surprised if you never see that revenue stream again. This is especially true for chronically used drugs that are prescribed for the life of the pet. Almost every veterinary professional I have met truly wants to save their clients money when they can — and some clients are having to make some tough choices where to spend their discretionary income.
Tip: It makes good financial sense to charge clients lower margins on maintenance drugs and higher margins on drugs used for short-term treatments.
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