While there is a lot of information out there about pricing, few veterinary practice owners or managers think about it strategically.  The industry standard is to follow a cost-plus model which, unfortunately, can lead to over pricing in a weak market and under pricing in a strong one.  According to Thomas Nagle, the financial questions that should drive proactive pricing are, “How many more client transactions must we achieve to earn additional profit from a lower price?” and “How many client transactions can we lose and still earn additional profit from a higher price?

Another common mistake made by many veterinary hospitals is to allow competition to drive pricing.  When managers reduce profitability of each transaction, they are confusing priorities.  Prices should be lowered only when they are no longer justified by the value offered in comparison to the competition.  Price cutting is easily matched and can create a race to the bottom.  Product and service differentiation, advertising, and improvements in client experience will not increase sales as quickly as a price cut, but they are much more cost-effective and longer lasting.

I was once asked for help by a veterinary rehabilitation professional whose schedule was so booked out that she couldn’t properly schedule rechecks for existing patients -- much less make room for new patients.  Because of space limitations and, at the time, limitations related to finding qualified practitioners, adding capacity was not an option.  My answer? Raise prices.  We determined that the practice needed to decrease its client load by 25%.  But this needed to be achieved without effecting the bottom-line.  The solution was to raise prices.  But by how much?

We had to solve for x.  It went something like this: If we raise our prices by x, and that causes a 25% decrease in volume, what does x need to be so that revenue is unchanged.  In this case, we determined that a $25 increase would do the trick.  While I couldn’t get the veterinarian to swallow that large of an increase, they did end up raising it by something like $17.  The result: a near-zero change in demand -- making the service $17 more profitable overnight.  Without perfect information about how price sensitive your clients are, sometimes you can only guess.  Our guess overestimated their price sensitivity, resulting in more profit for the hospital.

This example is exactly how you approach the question of “How many client transactions can we lose and still earn additional profit from a higher price?”

Here are the 10 questions you should be asking -- and answering -- before determining your prices:

1. 1.What sales change (transaction volume) would be necessary or tolerable for us to profit from a price change?
   

2. 2.Can we deploy a marketing strategy that will keep those sales changes within acceptable ranges?
   

3. 3.Do we know what our breakeven is for any given service or product?
   

4. 4.What costs can we afford to incur, given the prices achievable in our market, and still earn a profit?
   

5. 5.Is our price justifiable given the value of our product or service to the client?
   

6. 6.How can we better communicate that value, thus justifying the price?
   

7. 7.How can we convince our clients that our pricing has integrity and was measured against value?
   

8. 8.How can we segment the market to justify pricing differently when the value is different?
   

9. 9.What level of sales or market share can we most profitably achieve?
   

10. 10.What marketing tools should we use to win market share most cost-effectively?
    

If you’re unsure of the answers to even one of these questions, proceed carefully and do consider getting some help.  Pricing is arguably the most powerful marketing tool you have at your disposal.  Your proficiency at executing a solid pricing strategy will largely determine the financial success of your hospital.