In today’s increasingly competitive environment, we veterinarians are not immune from our clients’ tightened purse strings. Paying close attention to overhead and pricing decisions is always important, but during tough economic times it becomes literally a matter of life and death for industries that depend on disposable income. Wal Mart grew to be the biggest company in the world primarily by focusing on providing low prices, and their motto is: “Always low prices.” Everything they do, from their relationship with suppliers to their early and continuing devotion to information technology, is aimed at lowering their costs so they can pass these savings along to their customers. I’m not saying that the Wal Mart model is a perfect fit for professional service providers, like veterinarians, but there are some lessons we can learn from them.
In particular, Wal Mart has mastered the concept of “marginal cost” with respect to the pricing of products. Marginal cost can be defined as the cost associated with selling one more unit of something, whether that something is a bottle of shampoo or a dog spay. Let’s take surgeries, for example, and assume your fixed costs (i.e. rent/mortgage—things that don’t change depending on how busy you are) are $1000 per month attributable to your surgery room. Then add up the variable costs: surgeon time, suture, anesthesia, autoclave costs, cage space, and technician time attributable to surgery. Let’s say this is $100 per procedure. So your surgery costs are $1000 per month PLUS $100 per procedure. If you charge $250 per procedure, you would have to do 7 per month to cover your fixed costs. But on that 8th, or marginal, procedure your cost is only $100, netting you $150 profit for each procedure you do above 7 per month. (more…)