Product sales, market changes, and the impact on your profits (Proceedings)

It's been a number of years now that your clients have alternatives to purchase their veterinary drugs and supplies. First it was the catalogue houses and then the internet. The first to feel the effects of the change in distribution channels were the large animal practitioners. It has completely changed their business model and they no longer rely on product sales to provide revenue and profitability to their practices. It has changed the fundamental way large animal practices work with their clients and the way they earn a living. Many are now consultants or provide medical care and charge adequately for their services. The internet foothold took grasp with high powered advertising that has driven our clients to their web sites and at first only affected competitively shopped and exposed products such as flea and tick and heart worm medication. Many other products are now purchased from these companies. It has taken some time for these alternative purchase sources to grab hold, and now we are seeing the impact on companion animal hospital's overall revenue and profitability. Pharmacy revenue is flattening out or decreasing in many hospitals.

When these alternative sources of product became available there was panic on the street and many did not know how to react. Our friends have been the drug companies and distributors who indicated they would not sell directly to these alternative sources and would not provide a guarantee for the products distributed through to them. This was an admirable move on their part but the fact remains that the distribution channel still exists and is stronger than ever. The web company's advertisers have paid them dividends by conducting strong advertising campaigns.

So how did we get to this place? Well much has to do with the basic business model of the small animal hospital. The model is structured in such a way that hospitals are an all in one stop and shop for many clients. They come to our hospitals for total veterinary care and to purchase the products they need to care for their pets including prescription medications. Veterinary care includes wellness care, sick care, diagnostic testing and surgery. For some hospitals, ancillary services such as boarding and grooming also play a significant role. Some would suggest this business model is a good one that creates the one stop shopping experience that major retailers have created such as Wal-Mart and Target Stores. What's different in veterinary medicine is that we have let certain of our revenue centers be profit winners and some be losers. For example, lab services and product sales are two of the most profitable areas of revenue for many small animal practices. They make up about 45% of hospital sales.

The common small animal hospital business model is to let these revenue areas supplement other service areas where the fees charged to clients have been kept low and do not represent the true cost to provide them. The fees we are talking about run the gamete from the office visit and hospitalization charges to the price for surgeries including spays and neuters.

Veterinary service fees are represented by the investment made in the cost of education for the veterinarian and other costs to run the hospital such as rent, insurance, utilities, insurance and the cost of labor. Many of the costs associated with providing veterinary services are fixed. This means that the cost exists regardless of how many times a service is rendered. As an example, if the cost of occupancy for a hospital is $60,000 a year, it does not matter how many office visits the hospital has, the occupancy cost is still $60,000. So when you take away a profit center's revenue, such as pharmacy sales, it leaves your ability to cover the cost of occupancy with the remaining profit centers. If those profit centers do not generate enough income to cover its costs, than how do afford the $60,000 of occupancy costs?

If we ask the question another way: if product sales did not exist, what would you have to charge to maintain the same level of profitability and cover the cost of occupancy? Could you afford to only charge a client $42 for an office call or perform a dog spay for $180? How can a hospital afford to keep a competent level of staff and facility to provide excellent veterinary care? The answer is you would likely have to charge $140 to $160 for the same office call or $350 for the same dog spay so you could generate enough income to cover the lost income from pharmacy sales that went by way of the internet instead. Will your clients pay those fees? And how will would the profession adapt to a change in fee structure?

When we think of human medical care, the business model is different. Most doctors do not sell product. You go to pharmacy for your medications. You go to the diagnostic lab for your blood work. Human Physicians do bill $180 to $250 for an office cal but you never know it because you only pay an insurance co-pay of $30. Human pharmacies sell medications at less expensive prices because they sell many more times the quantity of medication than you see sold in a single veterinary hospital at a much lower profit margin and still make the same amount of profit. They make their profit from selling volumes of medications not by what is charged.

So what should your veterinary hospital do knowing the marketplace has changed? Do all you can to save the profit center? Do not rollover and just sign the internet script. Here are some things you may consider:

1. Offer the client convenience. Offer to mail the prescription to the client just like the internet pharmacy does.

2. Set up reminders for clients who are on long term programs for drugs so you can e mail them or send a reminder card that is time to get their next pharmacy order

3. Find alternative products to those that are commonly offered on the internet that you may offer through your hospital

4. Price match to internet prices on most commonly shopped items

5. Set up an internet pharmacy store and offer products for sale through your website

6. Do not charge a fee to write an internet prescription. It does nothing to establish or maintain client goodwill.

Maintaining pharmacy sales is important to profitability. It will be extremely difficult to change the cost of veterinary services if products sales disappear. Clients won't pay for it and veterinary owners will not easily move to a higher fee schedule. Continue to market pharmacy items to your clients and work to increase the amount of product sales, Train employees to communicate with clients about the products that are important to their pet's health and offer them for purchase. Establish pharmacy retail areas in your reception area and also in your exam rooms.

Change is always slow and competition is part of American commerce. If we don't adapt to the competing forces around us, they will overtake us and decrease profitability permanently in most hospitals. If profitability declines, practice owners will look to cut expenses. Many hospitals will not be able to afford the things that are important for progressive medicine, including improving staffing and the reinvestment for new equipment. Let's make this change positive so hospitals can improve the value of hospitals for the next generation of veterinary owners.