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Veterinary Forum May 2007 (Vol 24, No 5)

Business Skills: Challenge Discount or Die?

by Thomas E. Catanzaro, DVM, MHA, FACHE

    Editor's Note: In this month's column, Dr. Catanzaro dis­cusses the potential effects of discounting and adver­tising. In challenging economic times, these concepts are important for practice owners to understand. —Stephen Fisher, DVM, Column Editor

    In 1977, 88% of US veterinarians opposed advertising, and today most are doing it but say they don't like it. Why is that?

    Discounting yourself into prosperity

    In a 9% netting practice, after reasonable rent and appropriate salary for the owner, a 10% discount will never produce profit but will always decrease operational liquidity.

    We intuitively understand that the discounting or coupon logic is an attempt to increase traffic. Look at the simplified information in Table 1 , compare it to your practice's "promotion" logic, and ask yourself, "Can I create, or even service, that increased level of client access?"

    The reality

    In 1976, the US Supreme Court vindicated a Virginia pharmacist of alleged unprofessional conduct for advertising prescription drug prices. In 1977, the same court held that it was unconstitutional for a state to prohibit truthful newspaper advertising of routine legal services by lawyers (Bates and O'Steen v. Arizona State Bar Association). These two actions, one on products and one on services, set the stage for the reversal of the traditional advertising ethics embraced by the veterinary profession and other health care professionals. In 1978, the Bates decision caused the American Veterinary Medical Association (AVMA) Judicial Council to publish new guidelines, each reversing long-standing prohibitions:

    • No false or misleading advertising
    • No restraint on directory listing type or format
    • Fixed-fee advertising permitted for specific routine services
    • Specialty listings permitted for board-certified members
    • Advertising of available services permitted
    • Credit or bank card advertising permitted
    • Calendars and greeting cards permitted
    • ID tags permitted
    • Names on vehicles permitted
    • Promotional mailings permitted

    The court's specific rebuttals contain important logic in understanding why the profession is where it is today (in price and coupon wars):

    • A ban on advertising is essential to maintain professionalism — It is in the public's interest that they be informed of available routine services and fees for such services.
    • Advertising is misleading because of the inherently individualized nature of professional services — Only routine services lend themselves to advertising; non-routine services should not be advertised.
    • Advertising leads to increased overhead, the cost of which will be passed on to clients — Advertising will possibly reduce professional service costs through price competition.
    • Advertising will reduce the quality of professional services — Professionals willing to cut quality will do so regardless of advertising.

    The first veterinarian to advertise in any community incurred the wrath of his or her professional colleagues. Word of mouth has always been adequate, right? Before the days of competition, this was a true statement, but with multiple practices now within similar driving distance of the home, how should animal owners differentiate among surrounding practices, or how should a reputable veterinary practice differentiate itself from other practices in the area? (See the box The Facts Equal Reality .)

    Discounting prices

    Some communities have seen their veterinarians open the Pandora's box of advertising, and no one can close it — the extra net gain is being eroded by advertising and discounting. One national consulting firm advocates coupons and discounting to such a level that the practice cannot publicize net gain, only gross income changes, because virtually all the net is reinvested in more advertising and the consulting firm's fees.

    Some of the newest "practice assistance" companies are only discounters, requiring the practice to discount more than their net earnings per client just to receive new clients from the company's "advertising referral" programs, which can cost the practice lost net for every new client gained. Have you wondered why virtually every pet club ("if you discount to our members, we shall refer you") that started in the past decade has failed to survive?

    Some practices equate advertising with Aladdin's lamp, a magical source of new clients, but have never put together a team to retain them as return clients — three wishes and it is all gone. I know of two practices (of more than 2,200 visited during the past decade) that spent the time to train their teams to capture and bond clients on the first visit, and those teams realized a greater than 60% return rate in the following 60 days after the first visit. In these cases, a reduced cost (or free) first office call was the beginning of a relationship, not the gimmick of the month.

    With the average mature companion animal practice in the United States producing only a true net of 9% to 15% (after appropriate owner clinical salary, rent and return on investment), it is easy to grasp why the ethical consultants on the lecture circuit tell you that a 10% discount means the practice needs to at least double its business to remain at the current level of income. It also explains why the less-than-ethical promotions only speak about changes in gross revenue potentials. In some cases, the practitioner will say, "My net is 40%, so this does not apply to me." However, in most every case, this person has not yet deducted his or her own clinical salary from the net and, in some cases, has not deducted fair rent from the net. Table 1 assumes that a fair clinical salary for each health care provider has been deducted, all family members working in the practice are being paid and a reasonable occupancy expense has been deducted before stating the actual available practice net.

    In today's "low net per procedure" veterinary market, there are not that many free-floating clients available, nor is the practice built or staffed to handle the increased workload needed to balance a deep discount. The only way to make a total discount operation profitable is to severely limit overhead (e.g., mobile house call practice), slash daily waste (e.g., "shoot and scoot" vaccination clinics) or make someone or something else pay for the overhead (e.g., extra ancillary services or tenants within the facility). This is not to say we should not be pricing appropriately for wellness care versus curative medical services.

    Appropriate pricing

    Professional advertising takes an advertising professional. Some practices have staffs that are adept at getting the clients to decide to "buy," but most just try to "sell" their services and products. This usually is not perceived as being client-friendly and is probably one of the most significant reasons that human health care facilities primarily advertise services and market niche needs while veterinary practices offer "dental month specials" and spay and neuter discounts. Maybe veterinarians can now understand why dentists stress personal telemarketing but veterinarians use postcards and why most veterinarians have the worst net in the health care field. Most veterinary clients deserve better than what is being done today because all we really "sell" is peace of mind.

    The fee-based logic for most veterinary practices has been "hearsay," not an extrapolation of cost and overhead to drive adequate living wage and retirement savings. In the human health care setting, it is obvious from the dental field that paraprofessionals (e.g., dental hygienists) have created a much higher level of liquidity since the dentists quit advertising "less pain" a quarter century ago. The 30 minutes in the dental hygienist's chair for whitening or cleaning is about $100 to $120 in most communities, while the 30 minutes in the dentist's restorative chair is $500 plus. Our dental colleagues understand how client bonding works (6-month visits at an economical fee for a perceived benefit) as well as leveraging their skill (e.g., seven to nine hygiene chairs with two to three restorative chairs).

    Veterinarians could observe and emulate their dental colleagues (the AAHA Compliance Study, 2003, showed in excess of $300,000 potential dental income lost per doctor per year), yet most practices have their entry cleaning fee placed on restorative or curative fee levels, so they must "discount" to make it acceptable (rather than price appropriately for a staff-conducted "well care" service).

    Pet insurance is becoming better known, especially with the advent of wellness care reimbursement and two major players (VPI and Pets Best) alerting the profession and public to the benefits of pet health insurance. There are now six nationally recognized pet insurance companies (these are all based on "property insurance" coverage for pets, with no discount or practice payments), and most offer more than $200 in wellness care reimbursement to the owner for less than $100 per year premium.

    The two major pet insurance companies are making the miracles of modern veterinary medicine available at affordable prices and should be the answer for price-sensitive clients rather than designing an internal discount system that requires net dollars to be lost.

    In the next budget cycle, consider becoming professional in all the professional marketing efforts of your practice. Help the veterinary medical profession by helping yourself and your practice. Learn to niche market, not just undercut prices. Consider developing a practice-specific line of veterinary health care services, not a line of discounted services and coupons. Differentiate yourself and your practice by caring enough to be the best — not just the least expensive.

    NEXT: CareCredit expands to Canada

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