If you are in the business of caring for others, doing the right thing comes naturally. But doing the right thing can also cost you. Business owners who don’t stop to put together a strategic plan for their charitable work may find they’re giving away the store without even knowing it. Most importantly, a strategic plan can help you make sure that the time and services you donate will have a greater impact for those who need them. This was the experience of our recent client, a veterinarian whom we’ll call Dr. Brown. He contacted us to find out why his busy and successful veterinary practice, which employs four vets and 39 support employees, was suffering from low profit margins. To answer the question, we reviewed the clinic’s data, including salaries, revenue, pricing, billing, services offered, products sold, client retention, client demographics, marketing strategies, and – most importantly – the clinic’s overall approach to its clients.
For many veterinarians, pro-bono work — free or heavily discounted services for those who cannot afford them — is a key component of running an ethical and fulfilling practice. Since an animal’s need for medical care is independent of its owner’s financial status, veterinarians try to provide all animals with the care they need. That is why so many veterinarians make heroic efforts to keep prices low and to offer additional discounts or free services to clients who need them. However, many of the clinic’s expenses are not tracked, such as the owner’s labor in performing surgery, or time spent by the staff on repeat billing of a client who won’t pay. Because these expenses don’t show up on a balance sheet, it is difficult for the clinic owner to match them to the long-term losses he experiences. The challenge for veterinary clinics lies in providing a high standard of care to as many animals as possible while keeping the business solvent, covering overheads and supply costs, paying the staff a fair wage for their work, and building the value of the business itself.
You would not guess where
$500,000 “disappeared”
in a small business.
Here are the facts: Dr. Brown’s clinic had annual revenue of $3,260,000, which put it in the top 20% of veterinary clinics. However, despite outperforming 80% of its peers by revenue, the clinic was generating below-average profit margins. Dr. Brown was barely making a profit of 5% on his substantial investment in the clinic. What could explain the profitability shortfall?
It certainly wasn’t caused by the staff slacking off. We found that the veterinarians on staff (four, including Dr. Brown) brought in an average of 632 new patients per year, compared with the industry benchmark of 516. We also found that the total revenue per veterinarian was well above average when compared to other well-managed clinics. While the veterinarians received higher than average salaries, their productivity more than justified their pay. For every dollar in salary, the doctors were bringing in between $4.30 and $4.75 in clinic revenue. In other words, they were earning their keep.
However, compared to other clinics, it turned out that Dr. Brown had twice as much support staff per doctor. His clinic had a staff-to-doctor ratio of 9.3, while the industry average was only 4.4. This meant that while the veterinarians at this clinic were extraordinarily productive, they weren’t doing it alone. They relied heavily on technicians for helping with exams and simple procedures, which ultimately allowed each vet to see more patients. They also relied on receptionists to manage call flow, appointments, invoices, and documentation. The clinic’s reception staff had ballooned to 10 people! Did the clinic really need so many receptionists and technicians compared with so few vets? Did the doctors’ increased productivity justify the additional staffing expenses? Finally, did the revenue brought in by the doctors lead to substantial profits, or to more expenses? The answer turned out to be more complex than Dr. Brown expected.
Are You Selling Yourself Short?
To understand the dynamics of the clinic, we first have to examine its clients and pricing policy. Dr. Brown’s practice is centrally located between an affluent suburban area and a lower-income part of town. The clinic has always been busy because of Dr. Brown’s reputation for expertise and friendly charm. It was also busy because it offered some of the lowest-priced veterinary services on either side of town. In an effort to keep prices affordable for everyone, Dr. Brown was selling his services at well below the market rate. As a result, he attracted the most price-sensitive clients from all across the area. Some of these clients could easily afford higher prices, while others could not; yet all were getting a substantial discount. To keep pace with client volume, Dr. Brown had to hire more support staff.
However, the price-sensitive clients who came into the clinic were often looking for the minimum in animal care. For example, they might pay $115 to neuter a dog – a service seen by most clients as essential, and offered by Dr. Brown for 13% less than the regional average – but would balk at paying for such services as blood tests, micro-chipping, dental cleanings, and recommended semi-annual exams. Since a veterinary clinic often does not break even on common one-time procedures such as spaying and neutering, successful practices depend on ongoing relationships with clients who bring in their pets regularly (i.e. have a high Customer Lifetime Value or CLV). The pets under a veterinarian’s care also depend on regular visits to stay in good health. Thus, when clients refuse services they see as inessential, it hurts both the pet’s health and the clinic’s bottom line.
To make matters worse, some of the price-sensitive clients who came to the clinic suffered from bad debt problems. The absorption of these clients, as well as the extra staffing required to serve and bill them, created a liability for the clinic. Overall, the increased revenue from attracting a high volume of price-sensitive clients did not cover the increased expenses. Dr. Brown was donating his services and his staff’s time without ever making a full assessment of his charity.
A different take on “value”
On the other hand, clients who were not price-sensitive but were convenience-sensitive saw their level of service suffer due to longer wait times. These clients often had more disposable income to spend on goods and services for their pets, but they also placed a higher value on their time, and had a lower tolerance for waiting. While the doctors and staff became busier due to increased volume, all clients had to spend more time in the waiting room. This had the effect of filtering out some of the convenience-sensitive clients (who would typically spend more and have a higher CLV as long as the service was good), but not the price-sensitive clients (who didn’t mind longer waits as long as prices were low). As a result, the clinic saw more and more price-sensitive clients, who required more service – such as initial visit forms, billing, and reminders – but contributed less to the bottom line than the higher-income clients.
Since Dr. Brown’s clinic is on the edge of the affluent area where many of his highest-spending clients live, these clients were already driving out of their way to bring their pets to the clinic. With the added inconvenience of a long wait, Dr. Brown risked losing their business. However, the high-margin purchases by these clients were critical to the clinic because they were effectively subsidizing the liability from non-paying and minimally-paying clients.
Would you give away nearly
15% of your revenue base?
In addition to dealing with a high volume of low-margin services, Dr. Brown’s clinic had overlooked some important revenue sources and cost controls that help other clinics stay profitable.
Two such sources of revenue were retail sales and non-medical services. While a typical veterinary clinic derives 68% of revenue from medical services and 32% from other sources, Dr. Brown’s clinic derived 75% of its revenue from medical services, and only 25% from other sources. These sources can include non-medical services (such as grooming and boarding), medical product sales (such as medication) and non-medical product sales (such as pet care items). Most clinics derive a large portion of their income from selling discretionary products and services to clients with disposable income. Dr. Brown’s clinic was not tapping into the full potential of these market opportunities.
By increasing retail offerings, the clinic could increase profitability while keeping core medical services as affordable as ever. As Dr. Brown and his team continue to provide much-needed care to pets at a discount, they can offset some of the losses by offering retail products such as pet food, leashes, toys, and pet training videos. These products appeal to middle- and higher-income clients who would otherwise buy them at retail stores; moreover, offering more retail products at the clinic adds overall value for convenience-sensitive clients because it creates a one-stop shop for their pet care needs.
Another factor impacting profitability at Dr. Brown’s clinic was the cost of inventory. We found that inventory levels were far too high for some products, causing potential problems with storage, carrying costs, and expiration. On the other hand, some of the products were purchased at much higher prices than the clinic could get if it leveraged its volume. By finding the right level of inventory – high enough to take advantage of bulk discounts, but not so high as to create waste – the clinic could significantly reduce its product costs.
Remember the Big Picture
Of course, once we knew where the money was disappearing, the answer to Dr. Brown’s problem was easy: charge more, lose less. But that strategy would have been a poor fit for Dr. Brown’s business ethic. After all, he did not just want to increase profit; he wanted to increase profit while maintaining great animal care, affordability, and client service.
Can you combine profitability
and compassion?
Dr. Brown didn’t want to sacrifice his commitment to animals or to lower-income pet owners in order to increase profits – and neither did we. So, we suggested several ways in which the clinic could improve its margins without compromising animal care, affordability, client loyalty, or the jobs of current staff members.
1. Hire one more doctor on a part-time basis. Since the business structure of the clinic made it possible for veterinarians to be extremely productive, a new veterinarian associate could make a cost-effective contribution to the clinic. There was no shortage of demand to support an additional doctor – on the contrary, there was too much demand, with clients often putting up with long wait times. Hiring a new doctor would alleviate that problem. And the staffing resources already employed at the clinic were more than enough to provide the new doctor with adequate support. As a result, the patients would get faster, more efficient care; the clinic would get a new employee who contributes positively to the bottom line; the current support staff’s time would be used more efficiently; and the new veterinarian would benefit from the higher-than-average salary at the clinic. The new hire could also take over some of Dr. Brown’s veterinary workload and free up more of Dr. Brown’s time for managing the clinic.
2. Raise prices selectively. Affordability is a key concern for Dr. Brown, but affordability has the most impact when it is targeted to those who need it most. Dr. Brown could segment his market by raising prices for common services – such as spaying and neutering – while offering discounts to lower-income clients, elderly clients, or clients who adopt pets from shelters. He can also establish an “angel fund” to subsidize services for pets of the needy. While Dr. Brown can contribute to the angel fund himself — providing charity in another form — he would also get contributions from clients and the larger community. This would offset the clinic’s liability while providing lower-income clients with the services they need.
3. Open a satellite location in the affluent suburb. As we mentioned earlier, many of the clinic’s clients live in an affluent suburb nearby, and drive out of their way to visit Dr. Brown’s clinic. Some do so because they are price-sensitive and want to take advantage of the lower pricing Dr. Brown offers compared to veterinarians in the affluent area. However, many of the higher-income clients patronize the clinic simply because they like Dr. Brown and his staff. They would prefer to see him closer to home, and they would pay a premium for the convenience. The satellite location will be newer, more upscale, and will charge slightly higher prices than the main location. The price difference will effectively separate the price-sensitive clients from the convenience-sensitive ones, ensuring low volumes and low wait times at the new location. This way, all clients can get exactly what they want, and pay the price that is comfortable for them.
4. Negotiate with pharmaceutical suppliers for better prices. We examined the clinic’s costs for common items in its inventory, including medications and medical products. While most of the prices paid were reasonable, we found that the clinic was over-paying for some of its medications by as much as 33%. This could be due to purchasing habits not geared towards maximizing volume discounts. That is, purchases could be made in frequent small amounts that do not secure bulk discounts. By looking into discount pricing offered by its suppliers, this high-volume clinic could significantly reduce its unit cost for some products.
5. Expand retail offerings. An animal hospital’s mission is animal care, but the hospital’s clients are pet lovers who are always ready to lavish attention and treats on their pets. Giving them a way to do so not only provides the clinic with a great source of revenue, but also adds value to clinic services by giving clients more convenience. While bringing their pets in for vaccinations and check-ups, Dr. Brown’s clients can browse through the retail area for specialty pet products: vitamins, healthy treats, toys, name tags, training collars, pet-safe cleaning products, pet foods formulated for specific health needs, and even special devices for giving pills to cats! There is a multitude of pet-related products on the market, and pet owners are already buying them in pet stores, drug stores, and grocery stores. By selling only the products that meet with his approval, Dr. Brown can help his clients make healthier choices for their pets, while ensuring a healthier bottom line for his clinic.
Margaret Kaner is a management consultant at 2i America, LLC. 2i America specializes in business intelligence tools for optimal decision-making. Visit 2i America on ABC.
