A solution to the perennial problem of pricing?

Financial analysis and staff performance are the two subjects most in demand for our business consultancy service. Indeed, setting prices is a recurring challenge that has historically plagued many veterinary practices.

As there is no standard model, many practices have adopted a method of simply adding a set mark-up to medicine sales and this has led to their owners or managers having little idea or evidence on which services make a profit, break even or lose money.

As you can imagine, this situation severely hampers a practice’s ability to accurately value the business and, as a result, profit levels have tended to be low for many practices.

Zoetis’ software tool Profit Solver was launched successfully in the US and has proven its worth many times over with a number of pilot vet practices in this country. It works by using a practice’s own data to calculate the exact cost for 130 of the most commonly performed veterinary services, which typically represent 90% of practice revenue.

By looking at labour, inventory and equipment costs, and combining these with time and motion studies for each service, it is possible to identify the variance between cost and price – profit or loss. Using a collection of cost data, which staff perform certain parts of the procedure, how long the procedure takes and what equipment and materials are used, the correct pricing to cover costs and deliver a predetermined profit margin is calculated.

What’s more, using this software can help practices understand how their overall profit is generated. For example, for price-sensitive
procedures, such as vaccination, the practice can match its prices with the competition, but maintain its profit margin by increasing the price of other clinical services.

Case studies

St Georges Veterinary Group

Zoetis piloted the UK version of Profit Solver with St Georges Veterinary Group in Wolverhampton – a 19-vet small animal and equine practice. The practice’s managing director, John Goulding, described it as a game changer. One year on, he described the experience: “By and large, the veterinary profession still relies on the mark-up of medicines for its profits. Even practices that have made a concerted effort to move away from this type of pricing structure are still making their money from the sale of medicines rather than from vets’ fees. Like most of the profession, I have wanted to know exactly how to price our services and this was my opportunity to do just that.

“It’s important to take the time at the start to input accurate data from the practice’s latest set of accounts. For instance, for major pieces of equipment, such as x-ray machines, you have to work out how many times a year you are likely to use them. Most costs have an element of staff time, an element of fixed assets or equipment and an element of disposable items. Profit Solver takes all of these into account, adds the predetermined profit margin and produces an accurate pricing structure for each procedure within the practice.

“Twelve months on from implementing our pricing restructure, our income rose by £270,000, or 11.3%. This was actually £50,000 more than the increase we had expected to achieve from the restructure. At the same time, our price-sensitive fees rose by an average of less than 1%, so we were able to ensure we remained competitive.

“Of course, there are many factors that could have contributed besides Profit Solver, but, over the same period, the number of pets we treated actually dropped by 1.6%, yet this did not have a detrimental effect on our income. Instead, our fee income increased by 15%, with drug income growing by 6%.

“The major area where we found we were undercharging was for our hospitalisation fees. Our hospital fee income has increased by £46,000, which equates to 55%, although we have only hospitalised 20% more pets. I have an anecdote from the summer before we piloted Profit Solver, which is the perfect illustration of why it is such a game changer.

“We had to operate on the cruciate ligament of a dog to insert a metal implant. It took one of our vets two-and-a-half hours and we charged the client £2,500 – the standard practice price for an operation of this type. We then had another dog in with leptospirosis. It was very ill and was hospitalised with us for 13 days. While it didn’t need a metal implant, nursing it back to health involved a lot of time from our vets and VNs, as well as the use of disposable items, yet we charged £2,500 – the same amount as the ligament operation.

“This whole exercise has made us recognise where the costs are. For instance, in cases such as the dog with lepto we would now charge for disposing of the bio-waste – a service which cost the practice £20,000 last year.

“An unexpected benefit of our pricing restructure is it has made me much more confident about the prices we charge to clients as it is all broken down, so we can see exactly how the invoice is made up. I would be at a loss without it now.

“We have used the extra income generated to fund investment in equipment, air conditioning at our hospital, a rebrand and additional management staff. And, of course, now we have invested this income back into our business we are expecting to see an increase in profitability over the next 12 months. We are also continuing to use the tool for pricing up new services, which is proving very useful.”

Gillivervet

Gillivervet is a five-vet equine practice based in Anderton, Lancashire, and an early adopter of Profit Solver. Already operating at a 10.7% profit level, Profit Solver was able to increase this to 15.4% over a 12-month period, which equated to an additional £40,418 on the bottom line. As well as this adding a very useful average £3,368 per month to the practice’s cash flow, the adjustment will have increased the value of the business by £162,000.

Gillivervet veterinary principal John Gilliver said: “Historically, our price setting had been a mixture of guesswork, previous experience of pricing at other practices and some arbitrary increases. I was keen to make this a lot more scientific, hence my interest in Profit Solver.

“We were in for quite a few surprises. There were some areas where we were undercharging – for instance not charging for injection fees or the disposal of surgical waste – but, on the other hand, we realised the quotes we were giving over the telephone were often inaccurate and usually too high. We are implementing the changes at the moment and I am really looking forward to seeing an increase in practice profits.”

Three Counties Equine Hospital

Three Counties Equine Hospital in Tewkesbury is in the process of restructuring its pricing, based on Profit Solver. The practice was keen to explore whether its fees are reasonable and profitable, and to identify those procedures it suspected were either borderline or unprofitable.

Mark Georgetti, veterinary principal at Three Counties, said: “We have not completed a full year yet, but have implemented many of the increases identified by Profit Solver. The whole process has been a really useful exercise, especially in highlighting that we need to charge as accurately as possible. We had previously overlooked factoring in consumables, such as the use of everyday basic equipment such as stethoscopes and thermometers. It also made us evaluate how long procedures actually take – for example a ‘quick re-examination’ still uses a lot of a vet’s time.

“Profit Solver has been really useful in helping us identify where we can hold our prices and where we need to adjust them to make some procedures more profitable.”