In-House Mark-Ups: Should You Be Pushing Overpriced Products?
The title of this article was the provocative question sent to me by the assistant editor of Exceptional Veterinary Team. The task was to respond in a way that helps you see through some of today’s economic gloom, specifically how we should be thinking about pricing in these challenging days.
More importantly, it’s the very question that pet owners are asking each day in our consult room. And we’d better have an answer, because when your client looks you in the eye and asks why your product is double the price of the online retailer, a limp brush-off answer is simply not going to cut it.
Ethics and Selling
Breaking down this problem, we can see that the pressure on our prices is being driven by two sources, both identified clearly in the Bayer-Brakke study. These sources are increased competition and consumer sensitivity to price. The two are clearly linked; the conundrum for practitioners is what to do with our prices as our previously ring-fenced market opens up to aggressive competition.
But before considering this I wanted to address the ethical dimension inherent in the wording of the title. The use of the words “push” and “overpriced”, are almost certainly chosen to inflame the passions. The implication is that we have been unethical in our pricing and selling of products in the past. But this doesn’t stand up to much scrutiny in my opinion. Unethical selling would mean exploitation of a market, perhaps selling products that were not necessary, didn’t work, or were price fixed.
This is not a description I recognize of vets who seem virtually allergic to the concept, let alone the act, of selling. A great example from my own research comes directly from the consulting room. I have stood in consults with more than 50 vets and watched about 20 consults with each. During these consults, only 40% of the owners of animals presented for annual vaccinations actually purchased worming and flea products. Each, it should be noted, had need.
That’s severely underservicing the market, not over-servicing it! And I suspect that’s typical of vets worldwide. So let’s be clear from the outset. This is not a debate on the ethics of veterinary surgeons. It’s a discussion on how we adapt to the industry wide changes affecting the way we do business.
The Battle Ground
The real battlegrounds as I see them, the ones that threaten our credibility, are the flea, tick and worming treatments that have long been the staple of practice income. And we can now add in to this mix, thanks to some legislative changes and prescription drugs.
The question is whether, in the face of increasing competition, is it possible for the majority of clinics to maintain their historical margins on these products? Or is change necessary to survive?
Common wisdom was (and in many cases still is) to mark up all drugs by 100% then add in a dispensing fee. Customers may not have liked these prices, but they had little way to assess value as there were no competitive outlets to price check against.
Today things are very different. Customers can now buy many of these products online or in supermarkets. Both convenient and cheap, these options mean clients don't just have access to, but also have a keener awareness of the price that many of these medicines are available at elsewhere.
A recent review I conducted of online competition here in Australia revealed more than one retailer selling their product for almost the same price as what I can pay through my wholesaler!
Clients are noticing and are beginning to vote with their wallets. In many cases they are taking the advice we give out in clinic and buying their drugs online, or from the nearest pet supermarket. And with internet usage and competition set to increase in the decade ahead, there is every reason to think that this trend will accelerate.
Losing product sales is bad enough, but there is another, potentially greater problem lurking. The more occult danger in all this is that we are actually accentuating the impression of veterinarians and veterinary hospitals being too expensive across the board: a genuinely laughable suggestion to anyone with even a basic understanding of veterinary businesses, many of which are barely sustainable.
So is there any good news to bring to the table? Thankfully yes. We aren’t the only ones to charge a phenomenal markup on a product that can be bought cheaper elsewhere. There are means and ways to do it. There are also ways we can reduce the input cost of our medicines, and there are some more creative ways to fill the practice coffers.
Adding value at the point of purchase
Forget our relatively small price variations. High street retailers have a truly massive range of markups.
Coca-Cola, for example, can be purchased for about 50 cents per can in a supermarket to several dollars served with ice and lemon in a bar on Saturday night. Same sugary, brown stuff, but a price increase of over ten fold!
Although the difference in markup is astronomical we happily accept that this is the way things are and cough up our cash. There is clearly a lesson to be learned here. Our strongest value proposition is our trusted source of knowledge. We have to use this to our advantage more effectively.
An obvious way to get your prices down without adversely affecting profit is to buy your stock at a lower price. I am continually surprised to hear about the number of small practices that haven’t ever negotiated on prices. You can often negotiate several thousand dollars’ worth of savings just by asking!
Others have approached this problem buy joining buying groups: loose collectives of clinics who pool their purchases through select vendors to maximize price deals.
The market has in recent times seen a slew of generic medications coming online. Using generic medications allows you to offer better drug rates to your customers.
These are just some of the ways that costs can be maintained, but there is the final, nuclear option and one I think has great merit.
Reducing your markups
Gasp! Yes, there—I’ve said it. Personally I believe that we can combat many of the problems facing us by accepting that the days of 100% markup for everything are gone. If you chose to believe that this is sustainable then you either live in a very disconnected and/or wealthy area. Or you are in for a shock.
Chronic medications are seeing a downward pressure on price, but acute medications—the stuff people need here and now, no delays—are unlikely to ever be price shopped and are by definition in high demand. Therein lies an opportunity to balance the books.
Want to learn more? Download our "5 Tips for Joining a Buying Group" handout.