Veterinary practices typically derive the selling price for their goods and services in one of two ways. The first way is to take the cost of goods factored with either margin or mark-up to determine the selling price. The other way is to establish a “fair market value,” which is to set a fixed price that is competitive within the selling market.

Margin and mark-up are often confused with one another. Mark-up is the difference between the cost of a good or service and its selling price. It is often represented as a percentage of the product cost. For example, 100 percent mark-up would be doubling the cost of an item to reach a selling price. Mark-up can be calculated two different ways. One is a fixed mark-up, meaning that a set amount is added to the cost of goods in order to reach a selling price. A percentage mark-up is one that takes the cost of goods and multiples it by a percentage in order to reach a selling price. Margin refers to the profit generated by selling an item at a determined mark-up and subtracting all of the necessary costs associated with the sale. It is often represented as a percentage of the selling price. For example, doubling the price of an item will result in a 50 percent gross margin. These terms are often confused with one another, but they are not interchangeable.

The price the veterinarian pays for a product is the cost of goods. A product’s cost is not always the same; it can vary from one purchase order to the next. When using margin or mark-up to determine pricing, the selling price to a customer is based on the cost of goods. A fixed price doesn’t take cost of goods into consideration; it is a static price unless manually changed.

Using a fixed mark-up to determine pricing ensures that the selling price will always be higher than the cost of the product, and it accounts for variations in product cost. Every time an updated product cost is entered into the system, the selling price is calculated by adding a fixed amount to the cost of goods. This is a very safe way of calculating a mark-up in that you always know what you will be earning. This is not a popular way of calculating mark-up since it does not directly respond to market conditions. It is not very flexible.

A percentage mark-up is when you take the selling price and multiply it by a certain percent. This calculation always ensures that your cost of goods is covered and that your selling price will go up or down as your cost of goods fluctuates. This is a good thing when your cost rises. Using a percentage mark-up passes the cost increase along to the consumer. Many retail outlets use this method. This method can cause a reduction in earning if not properly managed. If the cost of goods goes down, the savings is also passed through to the consumer, which means less earnings for the practice.

A standard margin calculation also takes varying product cost into consideration. When a margin calculation is used, the selling price becomes a certain percentage above the cost of goods. This is also a good way to set a selling price.

The fixed price method will not adjust with the cost of goods. This is a method that is usually used in a “loss leader” scenario. This means that the practice may wish to advertise a set price on an item or service in order to draw customers in. The price remains the same no matter what the cost of goods does. This can be a risky proposition; if the cost of goods rises, the margin and profit shrink.

The numbers game

What happens when a practice receives a discount on a product or free goods? This is where you can help the practice now that you understand how their business works. When a product comes in with free goods or a discount, the process becomes a little more complex. Since the selling price of a product is usually based on the cost of a product, the clinic must be sure to manipulate the calculation in order to keep the same level of profit. A lower cost of goods translates into less revenue for the clinic when the selling price is an automated mark-up or margin calculation.

If a practice uses a fixed mark-up, they can still see the same revenue. For example:
1. Cost of widget = $1
2. Fixed mark-up = $1
3. Selling price = $2

No matter what the cost is you know that they will earn $1 every time you sell one. A lower cost of goods will lower the price to their customers, but they will still earn the same every time they sell one.

If you use a percentage mark-up, the story changes a bit. For example:
1. Cost of widget = $1
2. Mark-up = 100 percent
3. Selling price = $2

Look what happens when the practice gets a deal on the purchase.
1. Cost of widget = $.85
2. Fixed mark-up = 100 percent
3. Selling price = $1.70

They have reduced the price to their customers and reduced your income because they got a deal on the cost of the product. They are inadvertently driving their profitability down by buying better.

When a margin calculation is used the same thing happens if the process is automated. Example: cost of widget = $1, margin = 50 percent, selling price = $2. When the practice receives a deal it is exactly the same as the percentage mark-up. Cost of widget = $.85, margin = 50 percent, selling price = $1.70.

Reps often think that they are doing their customers a favor by offering deals or generic alternatives to name brands. While you do need to provide the best option for your customers, you should also go the extra mile in order to remind them of the increased earnings that they can recognize through these deals. If a practice records the correct cost of goods and takes the time to adjust their mark-up or margin calculation, they can recognize the additional profits that they were after when they purchased the deal from you. If customers are reminded of their profit potential, they may be able to make mark-up and margin adjustments that will keep them competitive and consistent with their customers. It is your job to understand these methods and remind customers of their own potential. It will make you more successful and more valuable as well.

Todd Brodersen has more than 16 years of experience in the animal health industry, specifically in executive level sales and marketing management. Todd has first-hand knowledge in conceptualizing and implementing best practices in sales, marketing, distribution and procurement. Todd operates Same Page Consulting, Inc. out of his hometown of Omaha, Neb.