How is your veterinary practice performing?
Of course, the obvious response is to discuss staff credentials and training, as well as the availability of state-of-the-art medical equipment. But do not lose sight of the fact that the practice is a business and in evaluating its performance, financial and organizational issues should be considered.
Of all the business decisions the practice makes, those involving setting prices for new products and services and changing existing prices are among the most important and impactful. Why? Because no other decision affects the practice’s revenues or profits as significantly as pricing decisions. The influence of pricing is direct, immediate, and measurable. If these decisions are not based on good information and sound strategies, the results can be damaging and costly.
Unfortunately, in the veterinary industry, it is not uncommon for practices to eschew more complex pricing strategies and pursue simplistic---and less effective---pricing. Industry pricing studies show that, surprisingly, pricing can be intuitive, and in a number of cases, arrived at with no apparent rhyme or reason. It may be a mischaracterization to suggest that pricing decisions are not taken seriously by practices. Clearly, owners and managers are aware of the importance of good pricing. However, they may not fully grasp the effort and commitment necessary to implement a powerful and constructive approach to pricing.
Lions and tigers and pricing…oh my!
One reason pricing can be difficult and intimidating is due its impact on profits. Although a successful strategy can bring the architect applause, if it fails, the fallout can be disastrous. With such high stakes, individuals may be reluctant to advocate too strenuously or put their imprimatur on a strategy that cannot guarantee success. Consequently, fear of failure may cause practices to adopt simple approaches that use apps, computer programs, or other ‘one size fits all’ solutions. Fear can propel practices to freeze price increases----even when offering quality service---believing that higher prices will scare clients away. Rash behavior, such as offering a raft of discounts and/or slashing prices below competitors, may also be motivated by fear. Fear-induced behavior yields irrational pricing that can hurt a practice’s profits and revenues.
Current pricing in the industry
The most important consideration in pricing products and services is understanding how much a client is willing to pay. The VHMA’s Pet Owner’s Economic Value Study provides well-documented information about the value pet owners place on specific services. The study is a well-researched, valuable resource, but many practices continue to adhere to long standing strategies that do not consider value. Below is a sampling of the strategies commonly adopted in the veterinary industry:
- Cost-plus pricing, a method that involves estimating all the costs that can be allocated to every unit of product or service and marking it up by an appropriate but arbitrarily chosen factor to arrive at the price.
- Historical pricing bases price on prices charged in the previous year with moderate across-the-board increases to account for increases in input costs, inflation, etc.
- Inherited pricing continues the pricing method established by a previous owner.
- Utilizing fee or reference guides that establish pricing without consideration for the individual practice or the unique needs of the client base.
- Trial and error, which is best characterized by arbitrarily choosing prices and adopting what sticks.
- Emotional pricing originates from the owner’s or veterinarian’s feelings about prices.
Based on research conducted by VHMA, many veterinarians feel confident that their pricing strategy is effective simply because they are satisfied that they are earning a decent profit, without considering how unexplored options can benefit the bottom line.
Time to rethink pricing!
To better understand whether or not a pricing practice is sustainable, review the following actions that generally indicate that a business would be better served by considering alternative strategies. If any of these characterizations sound familiar, the practice may wish to rethink pricing.
- The practice is resistant to changing prices even though veterinary prices are notoriously static. If current prices remain unchanged despite changes to input costs, client value, and/or competitors’ price changes, the strategy is unsustainable.
- The price strategy uses a simple approach that has been passed along informally or is based on commonsense.
- The strategy---such as cost-based pricing---sounded like a good idea when first adopted but was implemented without training or a deep understanding of the strategy.
- Pricing decisions are made independent of a business plan.
- Pricing decisions are made without reviewing client response data and without understanding how responsive clients are to price changes.
- Products and services are priced in a vacuum and the impact of these prices on the future of employee wages is not factored in.
- The entire client base is viewed as a homogeneous group rather that as diverse client groups that could benefit from strategies that deliver differentiated value.
- Client feedback related to price changes is ignored and there is no system in place to request feedback.
- The client/practice encounter is treated as transactional rather than relational.
- Staff is not educated about how pricing decisions are made and is ill equipped to effectively communicate with clients and respond satisfactorily to questions.
If any of the practices identified above describe how pricing is set in the practice, it may be indicative that a more thoughtful and effective strategy is needed. VALUE-BASED Strategic Pricing is one such strategy. The VHMA has identified this pricing strategy as the central issue of its Critical Issues Summit. VHMA has worked with industry experts and leaders to create a comprehensive repository of VALUE-BASED Strategic Pricing information, including a white paper and best practice tools, which can be found on the VHMA website. Strategic Pricing Webinars and a Virtual Workshop are also being offered, get details here.