Seven rules for profitable pricing

Seven rules for profitable pricing

May 15, 2004

No other single marketing decision impacts your bottom line as directly and powerfully as pricing: A 5 percent price increase is a 5 percent increase to your bottom line.

By contrast, how many new patients or new procedures would you have to do to see that kind of jump in your net? Yet, as simple and straightforward as pricing is, myths and misperceptions about it abound.

Setting fees remains one of the most challenging marketing areas for veterinarians and managers: deciding what to charge, when to increase fees, which fees to increase, and by how much makes most people anxious and unsure.

The following seven pricing rules are designed to demystify pricing and provide guidelines to help veterinarians and managers become more confident and comfortable in this very uncomfortable area of practice.

Pricing Rule #1: Cover Your Costs

When making pricing decisions, you always need to know what your costs are. If you price below your costs, you will go out of business. Costs are not just the dollars you pay suppliers; they include labor and professional time as well.

For example, you might compile the costs for a simple dental prophylaxis this way:

30 minutes technician time @ $12/hour
$6
30 minutes staff time @ $8/hour
$4
10 minutes veterinarian time @ $60hour
$10

SUB TOTAL LABOR   

$20
20 minutes Sevoflurane @ $84/hour
$28

TOTAL COST   

$48

In the above example, the total cost for the dental prophylaxis is $48. Or is it?

According to Veterinary Healthcare Consultant Kurt Oster, labor cost should be doubled to cover "hard" and "soft" labor, which would make the labor cost in this example $40. Overhead also needs to be assigned and there would be costs for a pre-anesthetic screen and possibly a fluoride treatment and more labor costs attendant to these procedures. Adding all of these costs together gives you a floor for pricing the procedure. It is the number you cannot afford to go below.

Pricing Rule #2: Determine the Profit Margin

If you price without building in a reasonable profit, you have no safety net. You have no margin for error or improvements. You will not be able to build up enough reserve to make repairs, handle emergencies, buy new equipment, improve the facility, give raises or pay yourself a fair return on investment. When making pricing decisions, it is not just the costs of the products, the labor and overhead that count. You also have to price for profit, because without a fair profit you cannot long survive in practice.

Pricing Rule #3: Price on the High Side

This might sound like odd advice, but most veterinarians are guilty of undercharging, not overcharging. Emotion, education and convenience, not price, drive the pet care market and you can usually afford to charge more than you think.

Clients base their buying decisions on four factors: 1.The price, 2.The benefit, 3.The value, and 4.The pain (giving up money). Think of a little black box with the price on one side and the perceived value on the other. Inside the box, the purchase decision is made. The client weighs the benefits (what I get if I buy this) against the pain (the money I have to give up to get it). Of these four pricing attributes, price and benefit are the two that you control. Of these two, explaining the benefit in terms pet owners understand favorably impacts their perception of the value and makes it easier for them to decide to spend the money.

In the case of the dental prophylaxis mentioned earlier, specific health benefits would need to be spelled out as well as less technical, but equally important benefits such as, "Your pet will look and feel better. And no more doggy breath!"

Pricing Rule # 4: Adjust Shopped Prices

Shopped fees are the ones that people call to ask about, e.g., "How much do you charge for vaccinations?" It is important to think through how you will handle this because you have the potential to convert every price shopper into a buyer. To convert a price shopper, you must first address the price issue for the perceived commodity service for which they called. This is best done by setting your fees within the competitive zone. For instance, in the case of vaccinations, you may charge for the exam, but you might have to give the vaccines at cost just to remain competitive with what others in your area are charging for the same thing.

Price shoppers don't know what they don't know and to them, the only difference is the price. Your goal should be to price competitively to get them in the door. Once they are there, you will have the chance to educate them and sell them on the value you provide as well as introduce them to other services that their pets need.

Never dodge the price question when speaking with a price shopper; instead demonstrate first how you are different and the level of care and attention they will receive if they choose your practice. Do this by asking the caller's and pet's names and using them in your conversation. Ask questions about the pet and then explain how you do the procedure, what your fee covers, and what the benefits are to the caller and their pet. Finally, ask if you can set up an appointment for them. You will be surprised at how many people say, "yes."

Non-shopped fees that your hospital charges need to be set to make up for the loss of profit from the shopped services, just the way emergency fees need to be set to make up the lost revenue from those who don't pay in emergency practices. In both cases, these are costs of doing business that need to be covered.

Pricing Rule #5: Take Routine Price Increases

Most practices plan to take at least an annual fee increase, but all too often let it slide. Other practices have no particular plan except to take selected increases when they notice that something seems "out of whack," or they hear something that encourages them to do so. Pricing increases, however, are a normal and routine part of doing business and they need to be scheduled on the management calendar.

The verdict is out on whether to take a single annual increase or multiple mini-increases throughout the year. The important thing is to make a commitment to taking routine, regular increases and just do it.

Pricing Rule #6: De-emotionalize pricing decisions

There is a reason veterinarians don't take regular, routine fee increases. It's called FEAR! What if you lose clients?! The truth is you only hurt yourself if you don't take increases. Any fear should come from the thought of losing money; money that could be spent to pay yourself and your staff better, spruce up the building, and purchase upgrades and new equipment.

Pricing Rule #7: Give Good Value

To give good value, remember that pricing decisions seldom follow the traditional downward sloping curve. Again and again, consumers make "irrational" but predictable purchase decisions. The ultimate decision for them is: "Is this a good value?" To make sure that you meet their value expectations:

  • Make sure your office looks attractive and smells good.
  • Make sure your hours are compatible with your clients' hours.
  • Make sure your staff is friendly, competent and confident.
  • Keep your clients up-to-date on new products and services you provide and the benefits to them and their pets.
  • Spoil your clients with thoughtful gestures such as giving them photographs of their pets.
  • Make a fuss over their pets and do little extra things (giving pet treats, taking a moment to get pets calm and make friends before handling them, a little pat on the head, a kind comment, a pediatric needle for small pets, and more).
  • Emotional "value-added" services like these build loyalty and overcome price objections. Where else can your clients and their pets get treated like this?

Finally, make sure that you and your staff believe you are worth what you charge and your clients will believe it too!


Pricing Quiz

Which of these pricing statements do you believe?

  1. Price too high and you won't have any customers.
  2. Price too low and you'll go out of business.
  3. Use discounts and you'll attract cheapskates and bargain hunters.
  4. Don't discount and you won't get new clients. You might even lose regular clients.

(There's a little truth to all of them, which is why fee-setting decisions are so complicated and intimidating. The only statement that is 100 percent true is #2; price too low and you will go out of business!)