Jerry, the receptionist, follows multiple steps when he accepts the delivery of vaccines. Unpack the box, verify that the invoice matches the contents, and place the drugs in the fridge. He then indicates in the practice management system that he received the order. This day, the computer shows that one vaccine dose costs the practice $3.90, but clients pay $35. “There must be a mistake in our pricing,” he thinks. Is there? Not necessarily.
Many front-line employees don’t understand the value and cost of providing a service or product or that incorrect prices can diminish profits. That’s why you should share your pricing strategy with the team.
Customer Value Proposition
Before we dive into pricing tactics and calculations, let’s explore the customer value proposition and its role in determining prices. Your customer value proposition summarizes why a pet owner would choose your veterinary hospital. Is your practice all about affordable care, so you focus on offering the lowest prices? On the other hand, your practice might be all about excellent customer service and innovation. Or delivering gold-standard medical care.
Top-notch services usually come with higher labor and training costs. In contrast, charging the lowest prices might mean investing in the most efficient processes, narrowing the scope of services and products, and shortening appointment times. Ultimately, you must determine your customer value proposition, prioritize it across your hospital and align your prices with it.
Setting up the fee schedule at a brand-new veterinary practice can be daunting, so start by defining why you stand out. If your established practice never identified a customer value proposition, please do it now before adjusing your prices.
Now, we can move on to a few pricing strategies.
Value-Based Pricing
According to American Veterinary Medical Association research, 50% of pet owners don’t see the value of regular veterinary care. Therefore, communicating value to clients is crucial. If your pet exams include extended time with a doctor, alert clients when they book an appointment so they understand you’re not running a low-cost vaccination clinic where the veterinarian might be present for five minutes before hurrying to the next room and not pausing to answer questions about nutrition, behavior and other topics.
Among the most misunderstood services are dental procedures. Educating clients about the benefits of regular cleanings and what they can prevent helps pet owners and your team understand the value of the service.
The biggest downside of value-based pricing is that it can take a lot of effort. In addition, the perception of value changes over time, so continuous staff training might be necessary.
Bundled Pricing
Selling more than one product or service at a lower price than the sum of the individual components is called bundled pricing. One example involves wellness plans. Not only are they convenient for the pet owner from a price and services perspective, but they also provide both primary and preventive care. The reduced cost helps a client’s budget by spreading the bill into smaller chunks over time.
For the clinic, wellness plans mean more pets remain in compliance with recommended care, and revenue increases when clients are financially able to choose additional services or products. Wellness plans also boost client loyalty and improve cash flow.
Other examples of bundled pricing are post-surgery treatments, chronic illness packages and new-puppy care. The downside is all those bundles can confuse clients and your team.
Ensure that everyone understands your bundled offerings, and confirm that they’re profitable.
Cost-Plus Pricing
Most veterinary practices use cost-plus pricing. Part of the reason is it’s easier to implement and takes little time. Here are the basics.
Markup vs. Margin
Distinguishing between markup and margin is crucial for managing profitability in any business. Markup is the percentage difference between your cost of goods or services and the selling price. For example, if your practice orders a product for $10 and sells it for $15, the markup is 50%. Margin, on the other hand, is the percentage difference between the selling price and the profit. In the same example, the margin is 33.33%.
Understanding both concepts is crucial for setting prices and maintaining a healthy profit margin.
Most practice management software systems can calculate prices. Your standard markup on a product should range from double the cost (100%) to 150%, depending on whether clients can shop around for it. Pet food tends to have a lower markup (perhaps 40%).
Here are other common examples:
- Vaccines: 4 times the cost (300% markup)
- Fluids: 10 times the cost (900% markup)
- Injections: 4 times the cost (300% markup)
- Anesthesia: 10 times the cost (900% markup)
- Cremation: 1.2 times the cost (20% markup)
- Laboratory: 2.9 times the cost (190% markup)
Implementing such an approach is easy. But would the prices be the same at an urgent care clinic versus a general practice? How about a mobile practice compared with an emergency clinic? Or a low-cost vaccination clinic? Make sure you consider other factors, especially your customer value proposition.
Veterinary practices must look at the bigger picture when determining prices, taking into account expenses, goals and the clientele. For example:
- Overhead: What is the cost of running your hospital? Include rent, utilities, equipment and insurance.
- Labor: How much do you spend on payroll and fringe benefits?
- Profitability: What is the practice owner’s desired return on investment?
- Market: What can your clients afford, and what does your competition charge?
- Revenue mix: Do you make more from vaccines, surgeries or walk-ins?
Other Calculations
When it comes to veterinary services and cost-plus pricing, you need to consider overhead, operating minutes, doctor and technician labor costs, and profitability goals. For example:
- Overhead: Add up all the expenses except for the cost of goods sold and, in some cases, labor. If your doctors are on a straight salary, include their wages here. Also, include support staff wages but exclude technicians. In this case, let’s say your annual overhead totals $260,000.
- Operating minutes: Calculate the minutes your practice operates annually. If you’re open Monday through Thursday from 8 a.m. to 7 p.m. and close daily for a one-hour lunch, that’s 124,800 minutes a year. Therefore, your overhead cost per minute is $2.08 ($260,000 divided by 124,800).
- DVM labor cost: Let’s assume it’s $1.02 a minute.
- Technician labor cost: Assume it’s 88 cents a minute.
- Profitability goal: A profit margin of 10% to 12% is average. A practice is financially healthy with a profit of 14% to 18%. Anything above 18% in general practice is exceptional. Urgent care and specialty hospitals typically aim for 15% to 25%.
Here’s how it works when determining the price of a wellness exam.The exam is assigned a 20-minute slot: 10 minutes of technician time and 13 minutes of overlapping doctor time. Your practice’s profitability goal is 20%.
We can calculate the exam cost since we determined your overhead and the DVM and technician labor costs per minute. Ten minutes of technician time is $8.80. Thirteen minutes with a DVM is $13.26. We allocated 20 minutes of overhead ($41.60). Based on those figures, the wellness exam price should be $80, providing $16 in profit.
The formula assumes a fully booked appointment schedule. If appointments are staggered or double-booked, you can set the doctor’s time at 10 minutes.
Such an approach is time-consuming, but it clarifies the cost of running a practice and providing quality patient care.
Market Analysis
Remember that clients must receive value for paid services. Otherwise, they’ll likely decline your recommendations and find a more affordable hospital. Therefore, know your area’s demographics. Are you rural and see dogs and cats that live outside of the home? Or are you in a city full of young people who treat their pets as kids? Each generation has different expectations and looks for different experiences.
Suppose you own a mobile practice in a market that’s all about convenience. Your overhead likely will be lower than that of a mortar-and-brick practice, but you might have higher DVM costs. Also, competition can influence prices, so be aware of your area’s most shopped products and services, like vaccines, spays, neuters and diagnostics.
You might discover that clients decline fecal tests at your regular price of $55. You then might lower the fee to $40 and suddenly perform more tests. Such a swing could lead to the sale of other products or services. If you lower your fees, ensure the service or product remains profitable.
Finally, pay attention to your revenue mix. The more money your hospital generates from medical services than from products or ancillary offerings, the more profitable your practice will be. For example, profit margins should be much higher on professional services than on the sale of parasiticides. Likewise, professional services are more profitable than boarding, grooming and day care.
Putting It All Together
Each pricing strategy has its pros, cons and limitations. Run through the cost module to understand whether your bundle- and value-based pricing are reasonable. You don’t want to lose money on the sale of a product or service.
And what about Jerry? He spoke to the practice manager about his concern that the newly arrived vaccine was mispriced. He learned that the practice’s customer value proposition is the best client service. He also heard that the vaccine has a different price when sold in a multidose package and that the first round of shots is included in the new-puppy exam fee. Knowing the whys, he can now communicate the value and benefits to clients. What about your Jerry?
HOW MUCH TO CHARGE?
According to a Veterinary Hospital Managers Association survey, 46% of the respondents raised shopped-services fees by an average of 6% or more in 2023. In addition, 80% used cost-based pricing to set product fees.
NOT ENTIRELY FREE
An American Veterinary Medical Association article posted at bit.ly/3SFCE33 offers this advice: “If you offer ‘complimentary’ 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.”