Benchmarking, Ratio Analysis, and Pricing in Veterinary Clinics

On the profit and loss statement (P&L), there are two main drivers of profitability for a veterinary practice: Cost of Goods Sold and Labor. These two categories make up the vast majority of your expenses. This series from Vetcelerator will feature how to think about the challenges of managing the cost of goods sold (COGS) at your veterinary clinic.

The table of contents for what’s to come is as follows:

1. Understanding Cost of Goods Sold: Misnomers and Measurement
2. Benchmarking, Ratio Analysis, Pricing
3. Ordering Strategy to Increase Cash Flow and Lower COGS
4. Red Flags in your Cost of Goods
5. Buying Groups

Setting Goals for Veterinary COGS

Ok – so let’s imagine you read the previous issue and implemented a consistent process for your accounts payable and categorization of your formulary and inventory.

You may now be able to answer the questions: what is my cost of goods sold or even what is the breakdown of my cost of goods sold by product type and how has that changed over time? You may also wonder: what should my cost of goods sold be, and/or what is my goal?

This article will help with that and give you some other ways we can use this information for practice efficiency.

Benchmarking Veterinarian Cost of Goods Sold

What should your cost of goods sold goal be, and what is a good number to achieve? The short answer is that it depends. The benchmark for an urgent / emergent veterinary practice should be very different from that of a general veterinary clinic. Likewise, a practice that is hyper-vigilant about special orders and leveraging their online pharmacy should have a very different cost profile than an average practice. So, there are two comparative benchmarks you should consider when thinking about this goal.

Compare to Others: Take the industry average Cost of Goods Sold and the median, the range to determine where you fit. There are some good resources available here, such as WMPB or VHMA, and you can always ask our friends at Inventory Ally and Highfive Vet. All will have benchmarks available that set target ranges for efficient Cost of Goods Sold at a veterinary clinic. The trouble with this method is that your specific circumstances may not mirror the average, and if you’re above average, this isn’t very prescriptive to what you should change.

Compare to Your Own History: If you don’t have historic data, start plotting it now so you have it in the future. There are two parts to this: what is the current trend line of your % Cost of Goods Sold (month-over-month-over-month) and what is the comparison to prior years (month over last year, same month) to smooth out seasonality? Knowing where you exist against your own history will help you remove idiosyncrasies that make the average less helpful.

Caveats to Veterinary Benchmarking Explained

When comparing to others, be sure to understand your product mix and how it may be different from the sample in the benchmark. Consider the breakdown in revenue for your veterinary or pet care practice. A very simple breakdown could be:

Services: Exam, Vaccine, Dentistry, Radiology, Online Pharmacy, Other
Pharmacy: Parasiticides, Other
Lab: In-house, Reference Lab

All of these sub-items have different levels of profitability and will influence the potential of your Cost of Goods Sold. In addition, some of the benchmarks above may be computed differently than yours. For example, one of them puts merchant processing into COGS (don’t do this as it will screw up your ratios discussed below).

In addition, consider your own strategy. For example, if you are targeting affordable veterinary care in a high-volume business, your Cost of Goods Sold may be vastly different than a full-service clinic with a completely different customer experience (though you may have greater profitability overall, just higher COGS).

So, have a goal, use your own history and use benchmarking data wisely. No singular benchmark is sufficient, and incorporate both to maximize your understanding.

As a note, a typical general practice veterinary clinic should be targeting 20-24% COGS. If you’re outside of these numbers, please talk to us about inventory management at Vecelerator because we want to know what you’re struggling with and what you’ve been successful with.

Ratio Analysis: Uncovering Financial Issues in Your Vet Clinic

In modern managerial finance, there are so many good ratios that we can now deploy to diagnose larger financial issues in our practice. Let’s look at two really simple ones.

Realized Markup (Sales/COGS)

Sure, you can go into your PIMS and look at markups individually. Doing this will give you the baseline for what you’d expect to get from an order of the item. But this doesn’t mean you will realize that margin after the fact. Looking at what was realized incorporates the mix of services ordered and the discounts that may have been provided, as well as gives you the reality of what happened, not what is expected to happen.

• Sales / COGS by category is the single, simplest way to spot errors across your practice. Period.
• By categorizing procedures, labs, and inventory into small meaningful buckets, you can spot trends when something goes wrong.
• Here are some common ratios to keep in mind:

1. 1. Vaccines: between a 3-5:1 ratio
   2. Labs between a 2-3:1 ratio
   3. Medication

• • • Paras: 1.5-2:1 ratio
    • Non-paras: 4:1 ratio
      
      
• If you are meaningfully different across these groups, more research is needed.

Inventory Turnover (COGS / Avg. Inventory)
This tells you how often you go through inventory. You can run this analysis by product or, again, by group. Ideally, an inventory turnover ratio of 12 means that you go through all of your inventory each month. A low inventory turnover number may suggest that you’re carrying too much inventory and you should consider a smaller size purchase or that an item is ripe for special order / online pharmacy.

How Ratio Analysis Really Works to Improve Veterinary COGS

Real email from a client is to follow. What prompted this email was a simple ratio analysis once Vetcelerator got a hold of the P&L and PIMS data. We categorized the expenses based on the simple categories above and made ratios for Sales / COGS for each of the categories. The In-house Labs ratio was 1.9x, which was lower than the reference lab ratio. We both wondered if that made any sense, so she pulled pricing and…

“What I found, however, is that the markup on the in-house tests was changed from 100% to 40% for most tests. I have corrected this for the individual tests. I am re-calculating the bundled fees, taking a closer look at additional supplies (pipettes, separate slides, dipsticks, stains, reagents, QC supplies, etc.) so I can include all of those items in the base cost of the test, prior to markup. This change should be extremely helpful!”

Zooming out and looking at the macro level with ratios helps diagnose issues underneath. It really works.

Tips For How to Price Goods and Services As A Veterinarian

Finally, when thinking about costs of goods, many don’t realize that a high COGS number may be the result of low prices, so we discuss pricing strategy in this section in relation to COGS. Your costs will change over time, so staying up to date on your pricing in relation to cost and the marketplace is critical.

Cost-Plus (Ordered Items)
Most practices apply a cost-plus strategy for the majority of the items in their catalog. Cost-plus means taking all the costs that go into the service and applying a markup on your cost to the item. This is a good practice as it is easy to implement, track, and update (for non-service items). There are certainly more sophisticated pricing strategies for value creation, but as a baseline, cost-plus works well.

Cost-Plus (Services)
For services, this is a bit more difficult. To apply cost-plus, the clinic needs to understand the cost of labor and overhead for a minute of time in the practice, then estimate or calculate an average time for a service and apply a markup to that time. For services, cost-plus is less straightforward, but an audit of procedure pricing in relation to cost of labor/overhead and average time to complete is oftentimes eye-opening to practices that haven’t performed the work.

• Know Your Competitively Priced Items: The goal of a phone call should be to get the appointment, in many cases. So, you should know which items your prospective customers are shopping for, and you should have a response to these pricing questions. For example: exam fee, heartworm test, and rabies vaccination. You should also know what the market price is for these items in your hyper-local area. Your team should know the prices of these items off the top of their head, as they will be asked about them by pet parents when they call into the clinic.
• Benchmark Against People That Do The Work: Similar to the old formula that you should look for a new home where Starbucks was building a new store, you can look for pricing strategies from larger stores that would have presumably conducted more market research than you.
• Have a Process for Updating Pricing: You should be updating prices, or at least checking them, at the time of receiving inventory so you are always up to date on prices. For competitively priced items, have a process for updating at least annually.

Conclusion

Vetcelerator specializes in making sure veterinary clinics are aligned across purchasing, pricing, and inventory management. As a member organization, we make sure to collect a P&L and inventory history at the start of our relationship so we can make sure your veterinary practice or pet care business is best aligned to be profitable. If any of this post resonated with you and you need help in setting strategic goals for pricing and inventory at your veterinary clinic, contact Vectelerator to help get your COGS in order.