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November 2024
Markup Math
In this competitive environment, there are special offers, seasonal “specials,” and other volume purchase discounts available to your practice. If you play your cards right, these can help clients save money while increasing your profits. But, if not properly taken advantage of, these savings may actually be reducing your practice’s profit.
Don’t Let Sales and Specials Cost Your Clinic Profit
If your practice is like most, you have a dedicated staff member who handles all the ordering for your clinic. They are likely pretty savvy at identifying and exploiting opportunities to save your practice money. In this competitive environment, there are usually manufacturer-subsidized Buy One Get One (BOGO) offers, seasonal “specials,” and other volume purchase discounts available to your practice. If you, like most practices, belong to one or more group purchasing organizations (GPOs), you have access to even more savings opportunities.
If you play your cards right, you can help clients while increasing your profits. But, if not properly taken advantage of, these savings may actually be reducing your practice’s profit.
Most companion animal practitioners, it seems, are motivated to save their clients money (sometimes even at their own expense). But what if there’s a way to accomplish both savings for the client and increased profit to the clinic?
Let’s look at a quick illustration to explain the point. If you buy product “A” for $1 and apply the “standard” markup of 100% (2 times cost) to set the price to the client, the client will pay $2 and the profit to the practice will be $1. Your distributor rep makes you aware of a BOGO or special pricing of product “A,” which lowers your cost to $0.50.
By applying the same markup (2 times cost), you will now charge the client $1 and the clinic will make $0.50 profit. Of course, the client will be thrilled to save 50%, but while you’ve effectively saved money on the purchase, you lost profit on the sale. You’ve given all the savings to the client. Of course, this only applies to items that you retail, and not for consumable goods that aren’t separately billed to the client.
There are two simple ways to avoid this problem. One is to keep the client price for the product the same even when you get a discount off of the usual purchase price. In this case, all of the savings to the clinic becomes increased profit. Unfortunately, none of the savings are shared with the client. Using the same cost illustration as above, the client still pays $2 and the clinic now makes $1.50 profit.
Most companion animal practitioners, it seems, are motivated to save their clients money (sometimes even at their own expense). But what if there’s a way to accomplish both savings for the client and increased profit to the clinic? With this in mind, an alternative approach is to increase the markup on discounted product “A” above your “standard” two times markup. If, for example, we increase the markup for this item to 3.5 times cost (a 250% markup), the new client cost is $1.75 ($0.25 less than before), and the clinic makes $1.25 profit ($0.25 more than previously). This creates a win-win. Both the client and the clinic benefit.
| Table 1 | Pioneer | Bioequivalent Competitor |
|---|---|---|
| Tab Cost (100 mg tab / dog / day) = bottle cost / 180 | $1.48 | $0.56 |
| DVM Cost (per dog per year) = tab cost x 365 | $539.79 | $202.86 |
| Client Cost (per dog per year) = DVM Cost x 2 (markup) | $1,079.58 | $405.72 |
| Profit to Clinic (per dog per year) = Client Cost minus Vet Cost | $539.79 | $202.86 |
| Table 2 | Pioneer | Bioequivalent Competitor |
|---|---|---|
| Tab Cost (100 mg tab / dog / day) = bottle cost / 180 | $1.48 | $0.56 |
| DVM Cost (per dog per year) = tab cost x 365 | $539.79 | $202.86 |
| Client Cost (per dog per year) = DVM Cost x 2 (markup) for pioneer, and DVM Cost x 4.6 (markup) for bioequivalent product | $1,079.58 | $933.16 |
| Profit to Clinic (per dog per year) = Client Cost minus Vet Cost | $539.79 | $730.30 |
Although this may seem like a trivial exercise to some, and too much effort to others, it’s a mistake that many practices make. Let’s look at the annualized potential for profit loss or gain.
Assuming that you have a typical three-FTE DVM practice that sees seven arthritic dogs per DVM per week (most veterinarians agree that it’s far more than this), that’s 21 dogs per clinic per week (1,092 dogs per year) that might benefit from nonsteroidal anti-inflammatory drugs (NSAIDs). Because carprofen is the most widely prescribed NSAID in dogs, we’ll use it to illustrate the point, and we’ll assume that the clinic purchases the largest-size bottle available (180 count) of the pioneer carprofen chewable tablet ($266.20) or a bioequivalent (generic) competitor ($100.04). We also assume that the average dog weighs 50 pounds, receiving 100 mg of carprofen per day. (Prices here are based on 2024 Vet Price List.)
You can see in Table 1 that even though you saved $166 per bottle by buying the bioequivalent product, you made less profit per bottle (because you did not adjust your markup for the discounted product). But your client did save $673.86 per dog per year. Client wins, clinic loses.
Table 2 uses the same initial costs to show what happens when you increase the markup for the discounted product. Increasing the markup on the discounted product results in the client saving more than $146 per dog per year, while the clinic makes $190.51 more profit per dog per year than with the pioneer. Client wins, clinic wins!
Factoring in all the potential cases determined above (1,092 dogs), by switching to a generic product and increasing the markup for that discounted product, there is an additional increased potential annualized profit of $208,036. This approach provides additional profit with no cost to the clinic and has the added benefit of providing savings to your clients.
Most practice management software allows for setting the markup (or margin) based on cost of goods. You can adjust the markup/margin for any inventory item. By paying attention to the value that generics bring to your clinic and increasing markup for discounted items, you will do a huge favor to both your clients and your clinic’s profit margin. Don’t let your purchasing savings lead to reduced net income.
Photo Credits: simoncarter/iStock via Getty Images Plus