Reprinted with the permission of Grupo Asis Biomedia, S.L, published 2011, Chapter 7, p.119 – 140. Management Solutions for Veterinary Practices is a copyrighted publication of Grupo Asis Biomedia, S.L. All rights reserved.
What is the biggest mistake a veterinary practice can make? This is a question often raised in veterinary discussion forums: congresses, management courses, informal meetings between practice owners…
Probably there is no one correct answer but in the author’s opinion the greatest scourge of our sector is an incorrect pricing policy.
Pricing is a complex problem with several possible approaches. Some argue that vets charge little because they have low social status unlike those in other professions. Others state that the excess of veterinary surgeons on the market makes it unfeasible to charge decent professional fees. There are others who also think that the excessive demands on this profession (the vet feels obliged to know about dogs, cats, rabbits, cardiology, traumatology, infectious diseases..) generate a feeling of insecurity in the professional. This ends up resulting in low self-esteem and consequently in having a complex when it is time to charge for services. Some believe that the general ignorance of the profession about the true cost of things also does not help matters. Others even propose the hypothesis that the veterinary profession is so conspicuously vocational that money takes second place, to the extent that vets feel bad about having to charge for their services.
All these are plausible theories and deserve at least the benefit of the doubt. The reality is probably a mixture of these and other related factors. What at least seems clear is that if the profession continues to behave as it has done thus far, the best it can hope for is to obtain the same results.
The rest of the chapter offers a pragmatic view of this problem. It does not try to diagnose the causes, it simply lists a series of errors with respect to prices commonly found in many veterinary practices and suggests tools for those who want to try to obtain different results.
1: To think that most clients make decisions based mainly on price
All the studies carried out on this issue show that this is not true. In a study done in the United States1 on a thousand households with pets it was found that:
- Only 24% of households with pets had ever changed veterinary practices over the life of their pet.
- Of that 24% that had changed at some point, just 15% (i.e. Less than 4% of total households) did it “because the previous vet was too expensive”.
In Spain an extensive study2 was also carried out which surveyed more than 1,200 households with pets. Some of the findings were:
- Only 19.6% of the households surveyed had changed vet at some point over the life of the pet.
- Of these, 11.6% (i.e. just over 2% of total households) had done it “because the goods sold by the practice were too expensive”.
- Price was mentioned in seventh place as a reason for choosing the veterinary practice (figure 1).
Regardless of what the studies show, one only needs a bit of common sense to appreciate that price is not the main deciding factor for most consumers. We only have to look at the restaurants, health clubs, dentists, solicitors, hairdressers etc in our local area to realise that there are a number of suppliers offering a range of services at varying prices. There are clients for each one of them (or the same client may choose one or the other depending on the circumstances surrounding the purchase).
Price is just one of the ways to compete, but fortunately it is not the only one. Moreover, the bad news for those that decide to compete on price is that in every economic sector analysed, we find the same pattern:
There can only be one leader in low prices (for obvious reasons: there is only room for one leader, the rest follow). Therefore, the veterinary practice that leans towards this strategy will always be at the mercy of the next one wanting to do it. The position of leader in low prices is only sustainable in the medium term for those businesses that are also low cost leaders. This is a key point that many vets struggle to understand: economy of scale. In sectors with high fixed costs (like veterinary medicine), the large businesses (i.e. those that have more clients and therefore higher turnover) end up having cost advantage over the smallest ones. This happens because these larger practices or hospitals can dilute their fixed costs (website, advertising, reception, administrative costs, equipment) between a much larger number of clients.
This is not to argue that price is not important to customers. In fact, even for those customers whose decisions are based on other factors, price is a relevant question because everyone likes to think they use their money wisely.
2: Not understanding the nature of the running costs of a veterinary practice
Mark Oppermann3 proposed a very interesting method to understand the real cost of providing a veterinary service. Most services provided in a practice contain three types of costs:
Veterinary costs: Let’s do the following calculation:
Annual practice salary costs for all vets. To calculate this we will need to consider the cost to the business, not the net salary received by the vets. For the salary costs that relate to the owner/partners, we will have to include, for the purposes of this calculation, a salary at the market rate (for example that of the best paid vet at the practice).
Annual total of chargeable “veterinary” minutes for the practice. In order to calculate this figure we will set the number of working days per year and multiply it by the number of vets (including the owner(s), by eight hours a day and by 60 minutes per hour. In the case of part time veterinary staff, we will make the appropriate adjustment. Finally, we will multiply the number of resulting minutes by an efficiency factor of 70%. The logic of using this factor is as follows: not all the vet’s working hours are directly dedicated to the generation of income. Telephone calls, case research and internal meetings are all examples of important tasks that can take up 30% or more of the vet’s time. Therefore, we will multiply the total annual veterinary minutes for our practice by 0.7 in order to calculate how many minutes are actually available to generate income.
Cost to the business per chargeable “veterinary” minute. This is the result of dividing A by B. It reflects how much it costs the practice each minute that one of its vets is available for a client.
Fixed or operational costs
Let’s do the following calculation:
Annual operational costs of the practice. For this we will take the income statement from the last full year and take the total costs of the business as a starting point. From this figure we will subtract the total annual costs for vets (A) and also the cost of supplies (drugs, pet food and other shop items). The resulting figure will represent the operating costs of the practice (nurses, administration, receptionists, cleaning, facilities, IT) that enable the vets to do their job.
Operational costs per chargeable minute of the vet’s time. As the reader may have already guessed, this figure is the result of dividing D by B. Its interpretation is how much it costs the practice to provide support in terms of infrastructure (facilities, support staff, etc.) for each vet for every minute that they are working for the clients.
Variable costs (cost of supplies)
This refers to the cost of drugs, swabs, vials, wormers, flea control, pet food and all the other things we use to provide a veterinary service. We must keep in mind that the cost of these supplies is not just the cost of buying them but also the financing cost to the practice (the money invested in this stock could have been invested in a bank account paying out interest), the cost of stock losses and things going out of date (it is inevitable that a certain percentage of our stocks will be lost or will expire).
Figure 2 shows the calculation of veterinary costs and operational costs for a medium-sized veterinary practice, based on a fictitious income statement (but that could reflect the reality in many practices). The reader is encouraged to adjust these calculations using real figures from their own practice and to reflect on the result… Are we charging enough for every minute of our vets´ time?
3: To make prejudgments about our clients and make financial decisions on their behalf
A very common mistake among vets is to prejudge how much an owner is willing to invest in the health of their pet based on their appearance.
Judgments are made according to the way the owners are dressed, the car they drive or the area where they live. No studies have shown a correlation between the level of income and the willingness to spend more on the health of the pet. The key is in the affective bond between the owner and their pet. Vets should not be judges of the affective bond between clients and their pets nor their financial advisors. Clients want to make informed decisions. What they ask of us is that we inform them of the options available and, if possible, recommend one.
A revealing experiment was done in the United States4, in which a clinical case was proposed to a group of vets. Half the participants were told that the pet owner was an elderly widow of modest means, whilst the other half were told that the owner was a young professional. Next the vets were asked to prepare a treatment plan for the patient, and an estimate for the client. The interesting thing about this experiment is that the vets varied significantly in their clinical approach to the case based on the information they had available about the pet owner. That is to say non-clinical considerations prevailed over clinical ones. Were these vets behaving like clinical vets, or like veterinary economists?
4: To mistake value with price, spending too much time talking about price and very little communicating value
Put simply, we could say that most financial decisions taken are based on two criteria:
- Value (what we get if we make that decision). This can be seen in terms of receiving goods, solving a problem, feeling happier…
- Price (what we must pay if we take that decision). This must not be strictly considered just in financial terms but also as working time, concern, inconvenience…
If the value of a decision exceeds its price it becomes attractive and we will probably take it. We will compare it with other available options and under normal conditions will choose that with a bigger difference
between its value and its price.
In the veterinary practice world, the most common error is to spend a lot of time and effort in arguing with clients (and with our own employees) about the price of services and too little talking about the value we provide in return. Figure 3 outlines a service that offers value to the client.
5: To give money away to clients (and what is worse, without them even realising)
It is estimated that in an average American veterinary practice, the annual amount of uncharged items can amount to more than 40,000 dollars. This may be due to an inappropriate discount policy, a poor administrative system used to account for services provided, or to a combination of both.
In the case of discounts, it would be a good idea if everyone at the practice asked themselves the following questions:
- How much money did we discount in our practice over the past 12 months?
- Who are we giving these discounts to? Animal charities? Pensioners?
- Those on low incomes? Other types of people? Why are we giving these discounts? For charitable reasons or because we have planned to do it that way? Are we perhaps giving them because we made a mistake when preparing the estimate? Is it because we dare not defend the way we have treated a case in front of a dissatisfied customer and think this is the way to appease them? Or is it simply because one of our employees has decided that our price is too high and is giving a discount with our money?
If we do not feel comfortable answering these questions, we must rethink our practice’s discount policy. To have a discount policy means having the answers to the following questions in writing:
- Who is authorised to give discounts at our veterinary practice?
- To whom and in which specific situations may discounts be given?
- How much can be discounted?
- How should discounts be recorded and who should be informed when a discount has been given?
6: Not giving value to time (not their own, that of the employees or that of the clients)
Some vets have serious difficulties in correctly attributing a value to people’s time. To start with, they do not correctly value their own time and as a result incorrectly charge for it. Moreover they sometimes have the feeling that if they do not sell something tangible to a client (drugs, pet food, an injection) they do not have the right to make a charge. Obviously if they are unable to correctly value their own time, they will find it even more difficult to value the time of their employees and clients. The most common symptoms of those vets that suffer from this serious pathology are:
- Mismanagement of the appointment diary, taking too long with the appointments therefore triggering delays that infuriate clients and put the reception team in an awkward position.
- They never find time to have a meeting with those in their team, even when they have expressly requested it. Moreover, when a meeting is finally arranged, either they arrive late or change it at the last minute.
- They never have a set time when they arrive or leave the practice and boast of working really long days. They are obviously outraged when practice staff are not willing to do the same or when a client complains about waiting for more than half an hour…
7: Not understanding the dramatic impact of an inappropriate pricing policy on practice profitability
The cost of salaries and facilities at a veterinary practice vary very little, regardless of how many clients come through the door. The fixed daily running cost of a medium-sized veterinary practice in Spain (with around 300,000 euros annual turnover) is around 600 euros a day, costs that will be incurred whether one or one hundred clients come through the door…This type of business, for which fixed costs are such a considerable part of their structure, are particularly sensitive to the pricing policy. A price reduction has a big impact on their profitability, especially when it has been observed that that the demand for veterinary services by clients is relatively “inflexible” regarding price5.
The demand for veterinary services is not very price sensitive
What does this mean? What is the elasticity of demand to price? This is a measure used by economists to calculate up to what point consumers of certain types of goods or services are sensitive to price variation. We talk of services being elastic to price when a price rise in these services is followed by a greater than expected decline in the demand, or when a decrease in the price of these services is followed by a greater than expected increase in demand. Conversely, we talk of services that are inelastic to price when a price rise is followed by a disproportionally small decline in demand, or when a reduction in price produces a disproportionally small rise in demand.
Studies to date show that veterinary services are relatively inelastic to demand and that within the range of prices studied, price increases of 10% used to be accompanied by reductions in client demand of only 4%
In other words, in most Spanish veterinary practices, taking into account current prices, a gradual price increase would result in a significant increase in profitability.
Making decisions: a practical exercise6
Let´s imagine a veterinary practice with the following characteristics:
- 5 vets (including the owner).
- 6 support staff (receptionists, nurses and administration).
- 3,000 active patients (those who have made at least one financial transaction in the last 12 months).
- Total annual turnover of 840,000 euros.
The owner of this practice is considering four alternative strategies to improve profitability:
Increase prices by 20%
An accountant acquaintance of theirs has commented that if they raise prices by 20% they can expect a decrease of approximately 8% in the number of active clients. In order to simplify our exercise we will assume that the practice staff would be maintained despite the decline in activity.
Lower prices by 20%
The same accountant has explained to them that this decision would attract 8% more clients. To simplify our exercise we will assume that no new employees will be recruited despite the predicted increase in activity.
Reduce by 20% the cost of purchases
This would be achieved through a significant improvement in purchasing conditions with suppliers and improving stock management.
Reduce salary costs by 10%
To convince their staff to give up 10% of their salary without reducing motivation or productivity (…). Yet again, in order to simplify our example and to better illustrate the conclusions, we are going to imagine this peculiar scenario as if it was somehow possible.
The exercise consists in ordering these four options from the best to the worst in terms of their impact on the profitability of the practice. We should take this information into account as well as what we already know about the behaviour of the demand for veterinary services with respect to price variation.
Let’s analyse the four options and their impact on the profitability of this veterinary practice.
To start with, this practice has 3,000 active patients and an annual income of 840,000 euros, i.e. an average annual income of 280 euros per patient.
If we increase the price (that is to say the average annual income) by 20% (up to 336 euros per patient per year) even if it means losing 8% of the patients (down to 2,760), the annual income will have increased to 927,360 euros. This represents an increase in income of 87,360 euros (927,360 – 840,000). The only rising costs that will be incurred at the practice with this option will be purchases (if we maintain them at a level of 24% of income will we assume an extra 20,966 euros).
In summary, this option would mean additional profits for the practice of 87,360 – 20,966 = 66,394 euros, that is to say an increase of around 48% with respect to previous profits.
Once again let’s remember that this practice’s starting point is 3,000 active patients and annual income of 840,000 euros, that is to say an average annual income of 280 euros per patient.
This time we reduce the price (i.e. the average annual income) by 20% (down to 224 euros per patient per year) but in contrast we achieve an increase in the number of patients by 8% (up to 3,240). That is to say the new total annual income is now 725,760 euros (a decrease of 114,240 with respect to the previous figure of 840,000 euros). This decrease will also come with a saving in purchases, in this case 24% of reduced income (that is to say 27,417 euros).
In short, this option represents a decrease in income of 114,240 euros from which we will subtract the savings on purchases of 27,417 euros which will result in a decrease in profits of 86,823 euros, in other words a decrease of more than 62% with respect to previous profits.
In this case we will achieve a reduction of 20% in the amount of practice purchases through negotiating better purchase terms and through better stock management. This represents a saving of 20% x 201,600 euros = 40,320 euros. This saving represents a rising profit for the veterinary practice, which, by these means, would see an improvement in final results of 29% with respect to previous profits.
In this option, the challenge would be to reduce the total salary cost of the business by 10%. This would be achieved by convincing the employees of the need to accept this measure without it affecting their level of commitment and motivation… Assuming this is feasible, the saving obtained would be 10% x355,752 euros = 35,572 euros, which would mean an equivalent increase in annual profits for the veterinary practice. This would result in an increase of 25% against previous profits.
8: Not knowing how to communicate to the team the importance and necessity of a proper pricing policy
It is a minority of veterinary practice owners who have held frank and open discussions with their employees about financial issues. Perhaps that is why there is deep confusion and false expectations around what a practice really earns. The employees will see money coming in (they deal with customers, charge for services, sell products) but are probably less aware of the expenses of a veterinary practice.
Let’s imagine that we arrive at a veterinary practice and carry out the following experiment. We gather all the practice staff and propose the following question: “Of every 100 euros of income that this veterinary practice earns, how many euros are final profit after discounting all the expenses of the business?”. In order to minimise bias in the answers, we ask all employees to record their answer individually and anonymously on a sheet of paper.
Figure 7 shows the result of one of these “experiments” conducted by the author in a veterinary practice. The vertical axis shows the percentage of profits against income that each employee estimated. On the horizontal axis are plotted the estimated values for each one of the employees of this practice.
There is a remarkable disparity in employee expectations in this practice. Some believe that their practice has profits close to 5%, others of 10-15%, others of 25-30%… and there is even someone who is convinced that the practice makes a 70% profit.
Let’s pause for a moment on the latter employee, the one who thinks that their practice is a highly lucrative business. What do we think the attitude of this person will be regarding the following issues?
- Level of prices at the practice.
- Discount policy at the practice.
- The importance of controlling costs (stock, consumables).
- The importance of managing payments effectively (following-up unpaid invoices, minimising non-payments made by mistake).
- Expectations of salary reviews.
We’ll leave the reader to draw their own conclusions…
To avoid these kinds of situations arising, the owner(s) must lose the fear of talking about money with their team. If no-one explains to the employees what the real profitability of the business is, they will create their own expectations (as seen in figure 7). Without going to the extreme of “open book management” (i.e. sharing all the financial information of the business with employees) which is advocated by some, there are ways to focus employee expectations. Practice management courses and articles in specialised journals can be an excellent resource for this purpose.
9: Victim mentality (constantly complaining of how bad the profession is without asking themselves what can I do to improve it)
Some veterinarians believe that “our real competitor is the poor service we offer in our practices”. Others, however, attribute all the ills of the profession to “external forces” against which nothing can be done: the government, the universities, the RCVS, the clients, the other vets…
Everyone will act (or not) in accordance with their views on this matter. What has been objectively demonstrated (Chapter 1, page 19) is that veterinary practices still have a long way to go until they routinely use good business management practices.
10: Thinking that profitability and good medical care are incompatible
Talking about business profits is something that is uncomfortable for many vets. It would seem as though financial benefits are in conflict with good medical practice, when in reality the opposite is often true. Good medical practice requires qualified personnel and the use of the latest technology. Without proper pricing (and therefore without business profits) it is not possible to motivate and retain quality staff or reinvest in training and technology. As is often said in the United States “good medicine is good business” or “healthy pets, healthier practices”. Our clients, our employees, our families and ourselves deserve the same respect and dedication as our patients… We all take for granted that good medical care is an obligation inherent to the veterinary practice. What about the rest? What about our responsibilities as a service provider, as employer, and as an investor?
- AAHA, Hill’s. The Path to High-Quality Care, Practical Tips for Improving Compliance, 2006.
- AVEPA, Hill’s. Mascotas Más Sanas Implican una Clínica Más Rentable (Healthier pets mean more profitable practices), 2007.
- Opperman, M. The Art of Veterinary Practice Management. Veterinary Medicine Publishing Group, 1999.
- Cron, W et al. Impact of Management Practices and Business Behaviors on Small Animal Veterinarians’ Incomes. JAVMA, nº 217, 2000.
- Brown J. et al. The current and future market for Veterinarians and veterinary medical services in the United States. JAVMA, nº 215, 1999.
- M erca der, P. Los honorarios profesionales de los veterinarios en España: una patología crónica (Profesional veterinary salaries in Spain: a chronic pathology), Merial Journal Report. Nº2/II, 2008.