What Is Strategic Pricing for Veterinary Practices and How Can It Help?

Practice managers are responsible for numerous business decisions. Of these, strategic pricing for new services and products is the most important. Virtually no other decision has a direct, measurable effect on a practice's revenues or profits as significantly as a pricing decision does. Thankfully, updating prices is an easy change for a practice manager to make. But, because of the immediate and significant impact, pricing decisions need the practice manager's full attention, along with a sustained and strategic plan.

What Is Value-Based Strategic Pricing?

Value-based strategic pricing is the process of making pricing decisions deliberately and thoughtfully, after considering all relevant factors — costs, customer value, reference prices, and the value proposition. This pricing structure is based on the practice's business philosophy and values, and can be clearly explained to clients, veterinarians, and employees involved in client communication.

The practice manager might consider developing a pricing process that is structured and information-based — and then use it every time. Consistency is critical as most pricing decisions take place within a constantly changing and competitive business environment.

The Four Pillars of Value-Based Strategic Pricing

When pricing strategically, it's important to consider the four pillars of pricing. You can also find these outlined in a recent VHMA white paper.

1. Costs

Veterinary practices use costs to establish prices. In pricing decisions, costs set the lower limit on prices. Most prices for veterinary services are set based primarily on costs. With value-based strategic pricing, costs are separated into two categories: incremental costs that are relevant to the pricing decision and need to be considered carefully; and non-incremental, which are irrelevant costs that should be ignored. Understanding these costs and how they will change with pricing is critical to making good decisions.

2. Customer Value

Customer value is the total amount of money that the pet owner is willing to pay for the functional and emotional benefits received from a veterinary service. It sets the highest possible price that the practice can charge. Understanding which features of the service add to customer value is important to price strategically.

3. Reference Prices

Pet owners rarely make purchase decisions or evaluate prices in isolation. When judging a price and considering the purchase, they compare it against other prices. Commonly used reference prices include competitors' prices, the practice's own historical prices, and other prices that the client may encounter. This structure provides the price range that clients consider to be reasonable as a third data point for pricing decisions.

Savvy practice managers also influence which reference prices clients use, and how they interpret them. For example, a practice may advertise a new client examination with an offer stating, "Regular price $99, this month's special $69," to get clients to use the higher amount as the reference price when evaluating the service.

4. Value Proposition

The practice's pricing can be consistent with the rest of its marketing activities. A value proposition is the formal expression of the practice's marketing strategy, describing the significance of its services' unique characteristics relative to competitors. For example, a practice may position itself around the claim that, "We have the lowest prices," to attract price-sensitive and value-conscious clients. By articulating what the practice considers to be its most important points of differentiation, a value proposition provides guidelines and constraints for pricing. It determines how costs, customer value, and reference prices are weighted in the practice manager's pricing decision.

Practice managers should try to not rely on just one or two of these factors in a haphazard or tradition-bound way. Instead, they might consider all four pricing pillars when making pricing decisions to maximize the benefit to the practice.

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Utpal Dholakia

Utpal Dholakia is the George R. Brown Professor of Marketing at Rice University in Houston. He is an expert on pricing issues and has written two books on pricing, How to Price Effectively: A Guide for Managers and Entrepreneurs, and Priced to Influence, Sell & Satisfy: Lessons from Behavioral Economics for Pricing Success. Dholakia's research has been published in marketing and management journals and cited extensively. He has consulted and provided expert witness services to many financial services, technology, health care, and energy companies. His popular blog on Psychology Today is called The Science Behind Behavior.

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