New ideas in setting fees (Proceedings)

New ideas in setting fees (Proceedings)

Aug 01, 2008

Setting fees properly is an important task in a veterinary practice; yet many hospitals don't really give much thought to how this should be done. They simply increase the current fees by some percentage every few years and assume that is enough. Unfortunately, it's not. In order to have a good quality fee schedule that contributes to practice profitability, you must have an understanding of all the key factors that impact fees, and more importantly, clients' willingness to pay them. Setting the fees isn't enough; a practice must also make sure they are providing the value that supports the fees as well as capturing all the charges and controlling discounts. These activities are as important as determining the fee itself.

The most important financial measurement to be made in a practice is that of true practice profitability. However, neither the "net income" figure on a practice's financial statements nor the "taxable income" line on the tax return represent true operating profits due to personal accounting choices, the type of entity a practice operates as and the IRS regulations for preparation of tax returns. Therefore many practices really don't know what their true profitability is. Not only is profitability critical to current cash flow, but practice value is largely based on profits and, in the last few years, the number of practices with no or little value has been increasing—to the point where the Valuation Committee of the Association of Veterinary Practice Management Consultants and Advisors coined the term "No-LoSM practice" to describe these practices.

Impact on profits
The impact of fee increases on profits can be dramatic but if you don't know what your true profitability is, how can you determine if your fees are helping you reach your financial goals?

Therefore, rule one in the fee setting process is to calculate what your true profitability is and understand the impact of fee increases. You may need to get help from your financial advisor to determine what your profitability is. Another resource is the No-Lo PracticeSM Threat Advisory Worksheet (a practice profitability tool provided by the Association of Veterinary Practice Management Consultants and Advisors) available at

Fees can be grouped into 3 different categories—price shopped fees, fees for services and fees charged for products. The fee setting process for each group needs to be approached differently.

In setting the fees (i.e. the markup) for products, you must first understand all the components of product costs:

  • Unit cost
  • Sales tax, if applicable
  • Ordering costs
  • Holding costs

Ordering and holding costs in most businesses comprise about 35-40% of the unit cost of an item. For example, if you order a tube of medication that costs $4.00; you are really paying about $5.60 for that tube after you factor in the ordering and holding costs. This may seem like a lot until you consider the components of these costs:

Ordering Costs

  • Time

o Determing need to restock
o Placement of order
o Reviewing shipment and invoice
o Unpacking
o Shelving
o Paying bill
  • Phone/fax/computer costs

Holding costs

  • Interest rate to finance inventory
  • Insurance
  • Personal property taxes
  • Theft/shrinkage
  • Maintenance of inventory
  • Space and utilities
  • Bigger orders = higher carrying costs
  • Time value of money
  • Licenses
  • Repackaging
  • OSHA compliance

Profit comparison
These costs can have a significant impact on the profitability of different kinds of revenue streams generated in your practice:

In general, the product profitability is not as high in many practices as one might think and it is critical that this be calculated when making decisions to match internet competitor prices, offer discounts on certain products to certain clients or otherwise not raise product prices appropriately.