Don't act like you're not discounting

Don't act like you're not discounting

You don't write it on the invoice, but you're doing it. Here's how it happens and how to stop it.
Aug 01, 2011

Do you discount your services? Sure you do. What? Don't believe me? There's not a single veterinary practice out there that doesn't discount in one way or another. You can't help it—our profession just hasn't kept up with the times. If you graduated from veterinary school in 1990 when the average distemper/parvovirus fee was $34, just keeping up with inflation would make it $56 today. If any prescription goes out your door for less than $24.45—even for a single pill—you're discounting. If your occult heartworm test is less than $40, you're discounting. You're discounting your services and products because you're not charging what they're worth.

Discounting is the act of selling a product or service for less than the list price. Of course, in our profession, there's no gold standard of list prices. Other industries do have standards to follow. In a restaurant, the entrée is priced at 2.5 times the cost of the ingredients. In a shoe store, keystoning is the rule; that means you sell shoes for twice your cost.

Rules to live by

To make do over the years, I've found these rules work well in veterinary medicine:

> Price over-the-counter products at 2.7 times cost.

> Price prescription items at double the cost per pill plus $24.85.

> Double your out-of-clinic lab's charge to you plus $23.

> Charge $8 per minute of surgery, from incision to last suture.

> Charge 3.25 times your office visit fee for anesthesia.

> Charge 3 times your office visit (minimum $120) for radiographs (two views). Additional views are $60 each.

That's just the tip of the iceberg. There are 295 other fee ratios I've calculated.

There are inviolable rules to being in business and we have to play by them if we want to survive. Here's one: No profit exists until you pay your overhead. In our profession, we seek—sometimes in vain—a 40 percent profit after a 60 percent overhead.

A look at the numbers

Table1 Example: Practice profits
Let's look at an example. Consider a solo veterinary practice with a barely acceptable $600,000 in gross revenue. Two-thirds of the revenue comes from professional services, 10 percent from over-the-counter sales, 17 percent from prescription drug sales and 7 percent from diets. Variable direct costs and fixed overhead (rent, salaries, insurance) is 45 percent. See "Table 1" for how the practice's numbers break down.

What should be immediately obvious is that professional services drive profits and everything else has a poor margin after deducting overhead costs. Over-the-counter sales operate with a maximum profit of 15 percent. Individual items may appear profitable, but say a bottle of something goes unsold for eight months. The cost of receptionists and air conditioning for the reception area rapidly eats up the profit. Any discount here is intolerable and must never ever approach 15 percent.

Prescription sales are keyed to a 15 percent direct cost and a 45 percent overhead cost plus waste, loss and expirations. Diets cannot be discounted. On the surface, it may appeaqr tyhat you shouldn't sell therapeutic diets because these bags and cans of food generate a loss. However, studies prove that associated sales concurrent with diet pickups bring in additional profits to compensate for the direct loss. That's why there's no such thing as a pet-food-only store. Leashes and gadgets are keystoned (100 percent markup), at minimum, and make up for the loss.

When you look at the big picture, inventory sales make up about one-third of revenue but offset a great deal of the overhead generated by professional services. Many practice owners debate this, but there are few practices that operate without the extras.