Balancing Client Expectations and Price Sensitivity in Veterinary Care
By: Max Truesdel
Pet owners today expect high-quality veterinary care, but rising costs and economic uncertainty make it challenging to balance affordability with profitability. For veterinary practices, finding the right pricing strategy is essential to maintain financial stability while ensuring pets receive the care they need. In this guide, we’ll explore how to implement price increases effectively, manage inflation’s impact, and maintain client trust during transitions.
When and How to Implement Price Increases in Veterinary Practices
Frequency of Price Adjustments
Price increases should be a strategic part of financial planning, not an afterthought. Many successful veterinary practices adjust prices at least once per year, with some evaluating pricing twice a year to respond to economic conditions. The key is to make incremental adjustments rather than large, sudden jumps that could alienate clients.
Timing Considerations for Veterinary Pricing
- Annual Review: Evaluate pricing at the start of each fiscal year, considering inflation rates and operational costs.
- Mid-Year Adjustments: If inflation spikes or vendor costs rise unexpectedly, a mid-year review can help protect profit margins.
- Service-Specific Increases: Prioritize adjustments in areas where costs have escalated, such as pharmaceuticals, diagnostics, and specialty procedures.
- Client Sensitivity: Avoid implementing price increases during financially stressful times (e.g., post-holiday months). Instead, time adjustments during periods of stable client spending behavior.
How Inflation Affects Veterinary Practice Pricing and Profitability
Inflation impacts nearly every aspect of veterinary practice operations, including:
- Supply Costs: Steady price increases for pharmaceuticals, medical equipment, and consumables.
- Staff Wages: Competitive salaries are necessary to retain skilled veterinarians and technicians.
- Facility Expenses: Rising costs for rent, utilities, and insurance premiums.
Without regular price adjustments, these rising costs can erode profit margins, making it difficult to invest in advanced medical technology, staff training, and client experience improvements.
Maintaining Client Trust During Veterinary Price Increases
Transparency is key when implementing price increases. Here’s how to help clients understand and accept necessary adjustments:
- Clear Communication: Inform clients in advance about price changes, explaining the reasons behind them. Use email, social media, and in-practice signage to ensure awareness.
- Value Emphasis: Highlight the quality of care, expertise, and advanced technology your practice offers. Clients are more likely to accept price increases when they understand the value they’re receiving.
- Proactive Staff Training: Equip your team with scripts and responses to address client concerns about pricing. Focus on the benefits of your services rather than justifying cost hikes.
- Gradual Adjustments: Introduce smaller, more frequent price increases to minimize sticker shock.
- Transparent Billing Practices: Provide detailed invoices that break down the cost of services, helping clients understand exactly what they’re paying for.
- Flexible Payment Solutions: Offer financing options, wellness plans, and preventive care packages to help clients manage costs more effectively.
Conclusion: Balancing Profitability and Client Satisfaction in Veterinary Care
Managing client expectations while maintaining profitability requires a strategic approach to pricing, cost management, and communication. By implementing regular price evaluations, carefully timing increases, and focusing on transparency, veterinary practices can continue providing exceptional care without compromising financial stability.
Omni Practice Group specializes in helping veterinary practices assess pricing strategies and financial health. Let us help you create a balanced and sustainable approach for your practice.
Read MoreInterest Rates Affect on Practice Values – Why now is a good time to sell
Interest Rates Affect on Practice Values – Why now is a good time to sell.
By Rod Johnston, MBA, CMA
Some of you may remember that in October of 1981, interest rates on home loans were 18.91%. Over the years, interest rates have gone up and they have gone down. In the early 2020’s, we saw some home mortgage rates go as low as 2.81%. If you were wise, you borrowed as much as you could at that time and bought a house, even though you may already have one. Coincidentally, home prices typically don’t follow interest rates. In fact, there have been periods of time over the past fifty years where interest rates have gone up and the average house price also went up. The same isn’t true for the value of practices.
When I first got into helping doctors sell their practices in the early 2000’s, interest rates for practice loans were about 7.5%. Most of the terms on those loans were 7-year terms. Meaning you had 7 years to pay off or amortize the loan. What does that mean for practice values? Banks determine how much they will lend based on cash flow after debt service. Debt service is the amount of your monthly loan payments.
To calculate cash flow, you start with the net income on last years’ tax return. Banks typically use 2-years tax returns, brokers when valuing a practice use 3 years of tax returns. I’m using one year’s tax return to keep it simple. You take the last year’s net income and then add back the non-operational expenses in the business. Those expenses are those that may not be necessary to run the business. Expenses could include gifts to employees, a continuing education class you took in Hawaii to get a vacation along with the CE, or meals you expensed for business. You can stop those expenses and still run your practice.
This gives you an adjusted net income. You then subtract your annual debt service to get the cash flow number. The banks then divide the cash flow after debt service by the annual debt service to get a debt service ratio number which should be above 1.2 times the debt service. So, if your cash flow is $120,000 and your debt service is $100,000, your debt service ratio is $120,000/$100,000 = 1.2 times your cash flow. Anything lower than that and the loan would be rejected, or you would need to figure out how to make the numbers work to get the debt service ratio up.
What does this have to do with practice values? Well, if interest rates go up, that’s going to cause a buyers debt service payments to go up. An increase in debt service will result in a decrease in cash flow after debt service. This will result in the debt service ratio going down and possibly dropping below the threshold of 1.2 times cash flow after debt service. The same goes for the term of the loan. Some banks now have 15- or 20-year terms on their practice loans. This reduces the debt service payments as the loan is spread out over more years. The result is a decrease in annual debt service payments which improves cash flow. A bank with a 7-year term may not get the loan approved, but a bank with a 15-year term may be able to do it.
Brokers know all this stuff. When good brokers do their valuations, they’ll do a check to make sure the bank will be able to finance the practice at a certain value. So, they’ll do a debt service ratio calculation and if it falls below 1.2 times debt service, then they should lower the value to price it correctly.
The good news is that there was a recent drop in practice loan interest rates. Interest rates on practice loans are between 5% and 5.5% at the moment. As a seller, this means values can be pushed a bit as the cash flow after debt service is improved with lower interest rates. A practice valued at $950,000, may now be worth over $1 million or even more. Because the lower interest rate resulted in lower debt service payments which helped increase the debt service ratio.
It’s good news for the buyers as well. Lower interest rates can lower their monthly payments as well. This may help them get into a practice that they may not have been able to purchase in the past as the ratio now works. This can be especially good in a startup scenario or in larger practices.
In summary, just remember that when interest rates are low, which they are at the moment, it’s a good time to have your practice valued and put on the market. It’s also a good time to be a buyer as your payments could be reduced.
If you would like a free consultation on the value of your practice, or to discuss a possible transition in the future, please reach out to one of the Omni brokers. We are always glad to help. Phone calls are always free and if you do a valuation with us today, we will update them for free in the future.
Read MoreThe Benefits of Practice Ownership
By: Kim Ford
In today’s market, we encounter fewer veterinarians coming out of veterinary school with the ambition to own and operate their own practice. Several new graduates are lured into a false narrative believing practice ownership is not a career option that would benefit them financially or in their goals to achieve work-life balance in their chosen profession. In truth, there are multiple reasons why a veterinarian may choose to own and operate their own clinic.
One is versatility and flexibility, practice ownership allows a veterinarian to make their own schedule, creating a greater work-life balance. You also have the flexibility to choose your staff and adjust the work schedule in the practice to maximize your time.
Secondly, independence in owning the practice allows the veterinarian to practice medicine the way they want to practice without outside influence. The veterinarian chooses their staff, creates the schedule, and controls pricing and services offered. These are only a few of the items but having freedom of ownership can be extremely rewarding.
Building on the rewards of flexibility and independence, most veterinarians find owning their practice fulfilling and take pride in ownership. They take pride in the client relationships they can build within their community. It is very satisfying to be able to practice medicine the way you choose and structure your practice according to your vision.
Last, but not least is the financial aspect of owning your own veterinary hospital. There is a greater increase in income potential that comes with practice ownership. A veterinarian’s annual income as a practice owner is much higher than working as a salaried employee. Additionally, practice ownership creates a sellable asset when a veterinarian feels it is time to move to another project, career choice, or retirement.
These are some of the positive aspects to practice ownership. Ownership has its challenges. These challenges begin with financing the purchase or start-up of the hospital or clinic. Despite this hurdle, there are several financing options available to qualified veterinarians. There is the task of managing staff and resources, marketing, and other entrepreneurial duties outside of practicing veterinary medicine. These challenges require work, but they are not as daunting as they initially appear. The rewards that come from ownership are worth the work that goes into the initial investment and organization.
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