Inventory Part III — Managing Costs and Pricing
The third installment of our inventory management series takes a look at what a clinic can do to maximize price points and value.
New here? Check out Part I and Part II of this series first!
When practice managers and veterinarians set prices on goods and services, most of them automatically apply their familiar formula — twice cost plus 15% on retail items, perhaps, or 100% markup on prescription drugs, or even price matching online pharmacies for heartworm products. But unfortunately, a lot of those decisions are based on guesswork, and our best estimates of what a fair price is for clients while still enabling the practice to make a profit. The pet care industry was estimated to be valued at over $60 billion in 2015 by the American Pet Products Association, with over $15 billion of that coming from the veterinary sector. So shouldn’t we take a little more care in determining what those price setting schemes should be, so that we can maximize our portion of that 15 billion dollar pie?
Nationwide Insurance and Purdue University School of Marketing have put together the Veterinary Price Index to better assess the changes in cost of wellness and medical services across the profession, and, though the most recent update isn’t due until the AVMA convention in July, some of the recent updates are pretty telling. According to the VPI, veterinary pricing increased 4% between January 2015 and June 2016, mostly driven by medical treatment cost increases than changes in wellness care costs — although a full quarter of veterinary related expenses for consumers are related to wellness, which means it certainly shouldn’t be neglected as an important component of a practice. Especially because, while the prices for medical care decreased 2 percent, the average cost for wellness care has gone up 8% in the last 4 years.
While we’re talking about percentages and costs of goods sold, let’s break down a common confusion point for many people when dealing with setting prices on inventory. Margin and markup are not the same thing. Margin refers to the percentage difference between profit and selling price. Markup is the difference between purchase cost and selling price. Neither markup or margin is equivalent to profit. Here’s an example:
A 30 day dose of prescription drug X costs the clinic $8 for the pills, plus another $2 for tax, shipping, the cost of the pill bottle, and the employee time stocking the bottle and filling the script. This makes the cost of goods sold (COGS) $10. At a 100% markup, the customer pays $20 for drug X — because the profit is 10$, the margin in this example would be 50% margin.
In other words, because markup is a greater number than margin, but doesn’t take into account COGS, it falsely inflates the difference between cost and selling price. Therefore, targeting margin rather than markup can add a substantial amount of profit to the books, when the percentages are calculated appropriately. Markups for drugs vary regionally, but are often around 150% the cost of the medication, tax, and shipping; most pharmacies add a dispensing fee for the bottle, label, and time counting pills as a flat rate for all drugs filled in house. Try to check online pharmacies for your most popular products to make sure you are not too far off from the competition for easily accessible products like flea and tick medications or dental hygiene products.
An interesting thing to note — of that $60 billion that the pet care industry is worth, the thing that takes up the highest percentage is pet food sales. Which means that if your clinic isn’t selling food, and selling a lot of it, you could be missing out on a huge potential revenue source. After all, not everyone’s pet needs a medicated shampoo or a prescription of carprofen, but they certainly all need to eat! As the veterinary clinic, you are in a unique position to both explain the benefits and components of the best diet for each particular pet, and sell it then and there to the client. Walking into a big box store is not going to give a client the expertise of the nutrition considerations and biochemical processes veterinarians spend years learning about. Prescription diets are a great place to start selling food to clients, but don’t limit your clinic! Questions about ‘natural’ diets, age-related nutrition, and price versus benefit should all be answered by doctors and qualified staff, not retail employees. And, because your client is already there in the exam room, if you stock their pet’s food you’re also saving them a trip — which might help them worry a little less about finding the absolute lowest price. Be sure to ask the food manufacturers you sell for sample bags of different diets, to help your clients explore the best option for their pet.
Before Vetcove, price shopping wasn’t cost effective — an extra hour of time searching for the best deal couldn’t justify a small margin of savings. But now, Vetcove makes comparison shopping easy and most importantly, fast — saving you time and money on ordering that you can reinvest into your practice and your people.
