The very nature of running a business is that one charges a proper price in exchange for the products and services provided to clients. Veterinarians in general find it hard to charge their clients and are typically shy to ask for the time spent in consultations and surgeries. The practitioner has to calculate and set prices based on sound business (marketing and sales) arguments. In general veterinarians around the world (and their staff) continue to be surprised about the price that many owners are willing and able to pay for (perceived) high quality pet health care. Owners have to be advised about the availability of such services as soon as they visit the practice for the first time.
General Principles on the Methodology
The construction of a fee you will charge your clients should have a logical basis. It is important in our society, because we are likely to be questioned on our fees or asked to quote a fee in advance for a routine procedure. We should be able to justify our response.
'Fees' refers to payment for the provision of a service whether it is a clinical examination, a surgical intervention, or, more difficult for veterinarians than lawyers, advice given without 'hands on' contact. Fees do not include the sale of veterinary medicines as a part of, or in parallel to, the provision of a service. The sale of medicines and other products (pet food for example) should be seen separately. For these products retail price should take into account the cost price, plus storage costs, out of date losses, broken bottles, 'left from shelf' items, as well as a profit on the exercise. A dispensing fee, if charged, is a fee for providing the service and is not linked to the value of the commodity.
As a rule, all costs of the practice other than those related to medicines should be recovered by the fees. This could be evaluated in a 'fee earning time' available in each day. Fee earning time is to some extent outside our control, but in a practice the average day based on an approximately nine hours working day, you will be 'fee earning' for only four to seven hours. This excludes driving time which is of great importance in large animal and equine work.
The number of fee earning hours is critical because, when multiplied by the number of working days in the year, it provides you with the total number of working hours for which you can reasonably charge your clients in a year. If you know how much you need to earn for the practice (excluding VAT) in a year, then it is simple to determine what hourly rate you must apply to your fees.
Facts vs Emotions
Setting the right price for a product or a service is an important part of the business in veterinary practice. Factors that influence the price level are based on facts and on emotions.
1. The cost of the goods
2. The price charged by competition
1. The perception of the price level by the client
2. The perception of the veterinarian and the nurse about the price level
Influence of Pricing on Revenues
Pricing offers a powerful tool to influence the profitability of the practice. Increasing the price will significantly increase profit in case variable and fixed costs are kept the same, or increase at a slower pace.
The Influence of Competition on Pricing
Competition based on (low) pricing is a very limited way to compete. It restricts creativity, it creates a downward business spiral and eventually kills the business, not only the individual veterinarian's business, but the overall veterinary business in an area or a country. A healthy price structure with competition based on product- and services portfolio, quality and of course, also a responsible price structure, will allow veterinarians to earn a decent profit in order to reinvest in the practice (staff and hardware) and allow growth. A healthy veterinary profession is in interest of the pets and their owners. Price battles among veterinarians restrict developments and limit the availability of services.
How to Decide What is the Right Price Level?
The baseline price will be determined by the cost of the goods or service increased by the proper margin. Next is the price awareness of similar products and services by competition. Neighbouring practices may have a more healthy cost structure (less fixed costs related to the buildings and the staff) and are therefore able to generate the same or better margins at a lower consumer price. Business owners should always be working on cost reduction and any costs that can be taken out, should be considered for the impact on the overall result.
Apart from the factors mentioned, the clients' perception of price is important. Not all clients are able and willing to spend the same budget for veterinary health care and products. Veterinarians have a tendency to 'guess' about the spending power of their clients, and offer services based on their 'guess'. One can be hopelessly wrong with these kind of judgments based on owner impressions.
The bottom line is: never judge clients based on perceived appearance, but base product and service offering and prices based on a proper business approach, and leave the choices to the owner.
Difference Between Cost and Price
The cost is the total amount of money necessary to buy a product or a service.
The price is the estimated value of a product or a service to either buy or sell it.
It is the process that determines cost
It is the market that determines price
If competition is low and demand high, the enterprise has plenty of latitude to fix its prices. It is important to notice that in most western countries, the animal health market is stagnant for the last few years, however the needs and demand of pet owners for medical services is increasing.
The cost is the sum of financial charges necessary to obtain a final product or service. When you evaluate the total amount of financial charges of a product or a service, you should in theory include the initial cost of goods, but add production cost (hourly salary x time, % of fixed charges such as rent, electricity, etc) to obtain the final cost of the product or service (ready to be sold). One should know these costs in order, if needed, to reduce the fixed costs (salaries, time for productions, overall expenses) and to abandon a product or, on the contrary, develop its sales.
Calculation Based on Margin
Generally it is simple to calculate the cost of a product, and therefore its retail price that you will determine according to the margin you wish to fix for that class of product. For a product one should look at the direct cost (buying price from the wholesaler for example) but also the indirect costs (time and salary of people involved in the transaction, cost of merchandising, turnover of the product, etc.). It is also important to implement the 'real cost' and include discounts, free goods bonuses, rebates, and other benefits that will impact on the cost.
Calculating the cost of a service is more complicated. One should look at the time of each employee and veterinarian involved in the transaction and add the hourly salary by such time. How much would you charge for your time? We suggest that you look at what is usually done for similar profession in your environment to establish such hourly value of your time. For example, in most western European countries, veterinarians (general practitioner) should value their time at least €100 / hour. Look at the hourly rate of your local plumber and you will feel better when you charge over €100/hour.
It is important for practitioners to establish their financial strategy related to their retail of their products and services. Just as in all small businesses, such setting of prices should follow certain rules and guidelines. Consulting an accountant will help in most cases to control that no major errors have been introduced in your financial process.
Remember that your objective is not to justify a price to your clients, but it should always remain to help your clients perceiving the value of their purchase.