Fee setting: Product pricing is a balancing act - DVM
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Fee setting: Product pricing is a balancing act
Are you looking at the right things when it comes to setting fees?


Inventory and product sales

Before worrying about price, we must examine expense management. In the competitive online market, lower markups are the norm. But veterinarians should be aware of how much product is wasted, lost to missed charges and outright stolen. Spend some time securing your valuable inventories before worrying about competitive pricing strategies.

Pricing product for sale has been discussed in the practice literature ad libitum. Generally, these methods revolve around a markup of 50 percent to more than 300 percent over cost, plus an added fee for "dispensing." The markup percentage varies even within a practice because of the type of product, availability elsewhere, prepackaging or lack thereof and competition. Some practice managers divide their inventory into three to five separate pharmacy categories that recognize big variations in markup because of a variety of factors.

A big factor is that of doctor pay. When a doctor's compensation is based in "production," he or she may be paid a percentage of the total sale price of an inventory item. If the percentage is the classic 20 percent to 22 percent of the gross sale price, the item must be marked up at least 50 percent to maintain break-even on an "out-of-pocket" costing methodology. On a full absorption-costing base, the markup must be 150 percent to reach break-even without any profit included in the budget.

Computers simplify total cost calculations and updating inventory prices. A good software program ensures that a minimum base cost as set by the practice manager is charged even when only a small amount of drug is dispensed. The dispensing fee is calculated to take into account labor for unpacking, marking and storing product, as well as pricing prepackaged OTC items. Labor and materials used in counting pills, reconstituting drops, repackaging in child-proof containers and labeling in accordance with federal and state regulations must be covered by the dispensing fee and/or the markup.

The costs of complying with controlled substance regulations must be considered in addition to the costs of collecting sales taxes and remittance to the state. Compliance with the OSHA Hazard Communication Standard should be considered, too.

The first step is establishing inventory codes and correlating cost in the computer system. The second is continued vigilance of incoming order cost. The ideal system is fail-safe integration of purchase orders and vendor data with practice management software. Until then, mandatory human intervention at the keyboard is the only way to keep up with perpetual inventory pricing.

As new inventory is received, the price should be adjusted in the system. Generally, the price should not be reduced, even if there is a temporary savings from the supplier due to bulk purchase or manufacturer price reduction. Old inventory still on the shelf should be sold at the price calculated for new items of the same kind.

Prescription diet, pet foods and supplies are difficult areas to price depending on Internet competition and practice philosophy. Desire to move more product and increase volume of sales may dictate reduced fees. However, be aware that the sale of such products may transplant sales of veterinary services having a much higher profit margin. This is especially critical in practices where staff, doctors or clients have a total invoice "comfort level." If this upper comfort level is violated, additional services that might have been offered will not be sold. Dog food and pet supplies with a low profit margin may have displaced these additional, more profitable veterinary services.

Dr. Heinke is owner of Marsha L. Heinke Inc., and can be reached at (440) 926-3800 or by visiting http://www.vpmp.net/.


Source: DVM360 MAGAZINE,
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