The veterinary profession is undergoing major changes in the demographics of delivery of some services and products.
Today’s pet owner is more educated and pickier in decisions regarding pet care. Today’s consumers are ever increasing their standards of “best value.” Over the past several years, due to the introduction of new heartworm preventives and flea control products, many practices have seen the service/ product mix of total revenues swing much more toward product sales as a major source of gross revenue.
Recently I have evaluated practices with as much as 40% of total gross income coming from the sale of products. This in itself is not bad for as long as it lasts, but it does greatly increase the vulnerability of these practices to decreased income if and when these particular products become easily accessed over the counter (OTC). It is very disturbing to see that the vast majority of practices are showing more gross profit income coming from the sales of these products than true bottomline profit in the practice, as defined by taking the true net income reported and deducting a fair investment return for land, building, and equipment, as well as 25% of gross income product by owners, as which is the fair compensation paid to another veterinarian for performing services for the practice. After these statistics are reviewed, sadly, many practice owners would be better off working as associates in another practice, eliminating the risk they are taking for the very poor returns they currently receive.It is crucial for long-term survival that practices immediately change to a major emphasis on providing professional services rather than merely being vendors selling products. Fortunately, there is significant pathology in the majority of patients we see every day. The problem in most practices today that minimizes the detection and treatment of pathology is complacency—being satisfied with less than maximizing the potential of every patient seen.
From a profit perspective, it is better to select potential profit center services that offer minimal competition from sources other than licensed veterinarians. Placing major emphasis on marketing services rather than products greatly reduces our risk of competition, limiting it to veterinarians committed to at least the same level of quality veterinary medicine as ourselves.
Marketing of professional services also has definite financial bearings as well. Typically products are priced simply by doubling the cost to determine retail price. Therefore approximately 50% of the selling price is “hard costs.” That 50% is all that is left to help pay the daily clinic overhead. However, when professional services are charged, the percentage of gross margin profits over “hard costs” of materials needed to provide those services is much greater, typically being at least 80% of the fee charged. A rule of thumb in pricing professional services is that the fee should be at least five times the costs of materials needed. The result of this strategy is that 80% of the fee charged now becomes available to help pay daily clinic overhead, as well as leave some bottom-line profit as well.