VNA Level III Module 7: Hills Product Profitability

Transcription

1 VNA Level III Module 7: Hills Product Profitability Learning Objectives Learning Objectives After completing this module, your basic understanding should include: Understanding how to determine the profitability of product sales in a veterinary practice. Appreciating that Hill s pet food products can substantially increase practice revenue and profits, especially when the health care team is actively involved in enhancing compliance. Comprehending the ancillary benefits of Hill s product sales. Knowing that proper pet nutrition with Hill s pet food products is great for the pet as well as the practice. Your progress is saved. Slide 1 of 19

2 Introduction Introduction Profit: the excess of returns over expenditure in a transaction or series of transactions; esp: the excess of the selling price of goods over their cost. Webster s Ninth New Collegiate Dictionary Unfortunately, there exists some confusion regarding veterinary product profitability, and more specifically, Hill s pet food products. Some mistakenly believe that Hill s product sales in veterinary practice is marginally profitable, or worse yet, not profitable at all! T.E.A.M. = Together Everybody Accomplishes More. Fortunately, credible, statistically valid research clearly demonstrates that Hill s pet food products sales contribute significantly to veterinary practice profitability and cash flow. In 2002, Hill s Pet Nutrition, Inc. commissioned the Economic Consulting Services group of KPMG, LLP to study Hill s product profitability in veterinary practices. Why KPMG? They re independent, objective, and enjoy impeccable worldwide business, finance, and economic credentials. Further, this same investigation team had outstanding knowledge and expertise in the veterinary field, having completed The Current and Future Market for Veterinarians and Veterinary Medical Services in the United States (commonly referred to as The Mega Study ). The Executive Summary of that comprehensive study can be found in JAVMA (July 15, 1999) or at ncvei.org/kpmg.asp. Your progress is saved. Slide 2 of 19

3 The KPMG Study on Hill s Product Profitability The KPMG Study on Hill s Product Profitability The Economic Consulting Services group of KPMG objectively investigated whether sales of Hill s Science Diet and Prescription Diet pet food products contribute to the profitability of veterinary practices. Specifically, the major questions KPMG addressed in the Study: 1. Do sales of Hill s Prescription Diet pet food products and Science Diet pet food products contribute to the profitability of veterinary practices? 2. How do veterinary practices set the retail price of Hill s a Prescription Diet and Science Diet brand products? 3. Do veterinary practices need to add space to sell Hill s Prescription Diet and Science Diet pet food products? 4. Do veterinary practices need to add staff to sell Hill s Prescription Diet and Science Diet brand products? 5. Does selling Hill s Prescription Diet and Science Diet pet food products result in more frequent contact with, or visits by clients? 6. How have client contacts or visits for purchase of Hill s products affected sales of ancillary products or services that veterinarians provide? Your progress is saved. Slide 3 of 19

4 Profile of Veterinary Practices Profile of Veterinary Practices The Study was conducted during the period from May 2002 through October 2002, utilizing extensive interviews of 101 veterinary practices located in 33 states. Data obtained are extremely precise. The sample of 101 practices provides a 10 percent precision limit at the 95 percent confidence level, i.e., with a probability of 95 percent that the calculated results would deviate from the true value by at most plus or minus 10 percent. The 101 accounts were selected randomly by KPMG from the population of Hill s veterinary accounts purchasing at least 10,000 lbs. of Hill s Science Diet pet food products per year. Practices in this Study represent a cross section of small animal practices in the United States. Gross practice revenue for these practices averaged $1.1 million in The practices had an average of 13.8 full-time equivalent employees, including 3.1 doctors, (~3.5 health care team members per veterinarian). Your progress is saved. Slide 4 of 19

5 Summary Results Summary Results Note: The following questions and the resulting highlighted comments in this section are direct quotes from the KPMG Executive Summary. Do sales of Hill s Prescription Diet pet food products and Science Diet pet food products contribute to the profitability of veterinary practices? Yes. The sale of Hill s Science Diet and Prescription Diet products can significantly contribute to the profitability of veterinary practices. How do veterinary practices set the retail price of Hill s Prescription Diet pet food products and Science Diet pet food products? The average markup realized on Hill s Prescription Diet products is 45 percent above the cost of acquiring the products from Hill s. The average markup for Science Diet products is 36 percent above the cost of acquiring the products from Hill s. A significant majority of respondents use the manufacturer s suggested retail price. Veterinary Nutritional Advocates should be able to effectively promote proper pet nutrition, enhancing pet health and practice productivity! Being an advocate for the pet s best interest and promoting proper pet nutrition makes great business sense! Your progress is saved. Slide 5 of 19

6 Summary Results Summary Results Do veterinary practices need to add space to sell Hill s Prescription Diet products and Science Diet products? For those practices that have incurred the additional cost of adding space, (remodel and/or building) to sell Hill s products, the average markup on Hill s Prescription Diet products drops by only three percentage points, from 45% to 42%. Similarly, the average markup on Hill s Science Diet products drops from 36% to 33%. Do veterinary practices need to add staff to sell Hill s Prescription Diet pet food products and Science Diet pet food products? Most practices have sufficient labor, and do not need to hire additional staff to support the sales of Hill s products. Does selling Hill s Prescription Diet products and Science Diet products result in more frequent contact with or visits by clients? Yes. Nine of ten respondents agree that selling Hill s products results in more frequent contact with or visit by clients. Studies, (including this one) have consistently revealed that veterinarians and veterinary health care team members would engage in nutritional discussions with pet owners even if they didn t sell pet food. It is good to know though, that selling Hill s pet food products IS beneficial to practice productivity. Clients buying Hill s pet food products at your practice will visit more often, which allows the veterinary health care team to reinforce compliance communications. Your progress is saved. Slide 6 of 19

7 Summary Results Summary Results How have client contacts or visits for purchase of Hill s pet food products affected sales of ancillary products or services that veterinarians provide? Two of three respondents agree that these contacts or visits often result in the sale of ancillary products or services that might not have been otherwise provided by the practice 100% 90% 80% 70% 60% Some Increase 8.2 Large & Very Large Increase When clients visit a pet-centered veterinary practice regularly for Hill s pet food products, the veterinary health care team has multiple opportunities to communicate with these pet owners face-to-face. Maximize these interactions by reviewing the pet s medical record, listening to client interests and concerns, and as always, being an advocate for the pet s best interest! 50% 40% 30% 20% 10% 0% Figure 1. Percentages of Practices Who Agree that Client Contacts/Visits for Purchase of Hill s Products Affect Sales of Ancillary Products/Services Heartworm Prevention Flea Products Skin and Coat Procuts Diagnostic Work Oral Care Surgical Procedure Your progress is saved. Slide 7 of 19

8 Back to the Basics Back to the Basics Let s clarify some of the basic math behind product profitability. Figures 2 and 3 show how to calculate the markup percentage and the profit margin percentage respectively. Figure 2. Calculating Markup Percentage Markup % = Retail Price (to the client) - Cost (what the practice bought it for) Cost (what the practice bought it for) For example, if your practice had a product that cost the practice $5.00, and sold it to the client for $7.00: Markup % = Profit Margin % = Retail Price ($7.00) - Cost ($5.00) $ $5.00 $2.00 = = Cost ($5.00) $5.00 $5.00 Figure 3. Calculating Profit Margin Retail Price (to the client) Cost (what the practice bought it for) Retail Price (to the client) = 40% For example, using the product in Figure 2, (cost to the practice: $5.00, retail price: $7.00): Retail Price ($7.00) Profit Margin % = - Cost ($5.00) = $ $5.00 $2.00 = Retail Price ($7.00) $7.00 $7.00 = 29% Your progress is saved. Slide 8 of 19

9 Back to the Basics Back to the Basics As mentioned previously, KPMG found the mark up percentage on Hill s Prescription Diet averaged 45% and Hill s Science Diet products averaged 36%. Contrast that with the markup percentage on pharmaceuticals in your practice. Very likely, the markup percentage on many pharmaceuticals is higher. Does that make the individual pharmaceuticals more profitable, (per pet, per year in a practice)? No, not necessarily! Many veterinarians and practice managers incorrectly assume a higher markup translates into greater profitability. Figure 4 shows that while Product B has twice the markup, (100 percent versus 50 percent) the actual dollar profit is less, ($5.00 versus $8.00). This simple illustration shows that higher markup percentages don t automatically translate into more dollars. Who wouldn t prefer $8.00 over $5.00? Remember, you can t spend percentages. Actual dollars are more meaningful than percentages. Figure 4. Comparing Markup Percentages. While Product B has twice the Markup Percentage of Product A (100%, versus 50%), it yields less profit, ($5.00 versus $8.00). Product A Product B Retail Selling Price (RP) $24.00 $10.00 Cost to Practice (C) $16.00 $5.00 Markup (RP - C) / C 50% 100% Markup $ $8.00 $5.00 Your progress is saved. Slide 9 of 19

10 Back to the Basics Back to the Basics But you can t look only at the margin either. Figure 5 shows that if you sell 500 units of Product D, but just 50 units of Product C, Product D is twice as profitable ($1,000 versus $500) - even though it yields a much lower margin ($2 versus $10). The moral of the story: You can t spend percentages. Comparing markup percentages between two products is irrelevant in determining product profitability. A product with a lesser markup, (for example Hill s pet food products compared to some pharmaceutical products) may generate extraordinary profits, while an item with a larger markup might yield little profit, sold infrequently. Business decisions based on markup percentages can negatively impact practice productivity. This simple fact remains widely misunderstood in the realm of general veterinary practice management today. But, now YOU know! Figure 5. Turns Matter! While Product C has five times the Margin of Product D, ($10.00 versus $2.00) the number of units sold, ( Turns ) has a dramatic effect on the overall profit. That is, a product with a lower margin may provide exceptional profits to the practice: Earns X Turns! Product A Product B Retail Selling Price (RP) $24.00 $10.00 Cost to Practice (C) $16.00 $5.00 Margin $(Earns) $10.00 $2.00 Number of units sold (turns) Profit $500 $1,000 Your progress is saved. Slide 10 of 19

11 Back to the Basics Back to the Basics So, if markup or margins are not the best methods to determine the profitability of a transaction, what is? Figure 6 shows that to determine the profit for a given product transaction, you need simply subtract the direct product cost from the retail price. Very importantly, note that no fixed-costs, (mortgages, payroll ) were allocated or assigned in addition to the direct product cost. KPMG states: IGNORE markup and margin percentages! No business can spend or invest with percentages. The dollar amount is what IS important. The use of a variable costing model is appropriate to measure the contribution that Hill s products make to a practice s financial health. The variable costing model assesses the contribution of a product or service based on how much direct contribution the product makes to profit after cost of acquisition. In the event there is little or no resource constraint in terms of the direct costs of storing, handling, and selling the product, then it is not appropriate to allocate additional costs to the sale of the product. Figure 6. Calculating the Profit of a Product Using a Hill Product Example Retail Price (to the client) - Cost (what the practice bought it for) = PROFIT Measured in dollars, NOT percentages! For example, a 35 pound bag of Hill s Science Diet Canine Adult Advanced Fitness:* Retail Price ($51.99) - Cost ($40.11) = PROFIT ($11.88) $11.88 Profit/bag x 6 bags = $71.28 PROFIT per year from this pet. An average 40-pound dog will consume about six bags a year, so: $8.92 Profit/bag x 6 bags = $53.52 PROFIT per year from this pet. * Based on Hill Price Sheet of June 2012 in the continental United States, using suggested retail pricing and veterinarian cost. Your progress is saved. Slide 11 of 19

12 Back to the Basics Back to the Basics Now that you know how to calculate the profit impact of a given transaction, how would you determine the true profit impact of an entire product line or category? Good question. Fortunately, the answer is very simple, and is based on information contained in Level III, Module 2: Revenue Sources. See Figure 7. You now know how to calculate the profit impact for a given product transaction in your practice: Retail Price - Cost! Figure 7. Calculating the Profitability of an Entire Product Line Average Charge per Transaction (EARNS: Retail Price - Cost) X Number of Transactions per year (TURNS: Number of units sold per year) For Hill s pet food products, since many products have different suggested retail prices and veterinarian cost, let s assume for an easy example that a practice made an average of $12.00 per bag or case of Hill s products, and that the practice had 2,000 purchases (number of transactions) the past year: $12.00 (average Earns) X 2,000 Turns = $24,000 PROFIT Note: Since many pets will consume, for example 6-12 bags or cases of Hill s pet food product per year,(depending on the pet s weight and package size the pet owner buys) the 2,000 purchases conservatively equates to only about pets. Your progress is saved. Slide 12 of 19

13 Back to the Basics Back to the Basics Now, let s consider the real-life example in Figure 8, which shows that for a 40 pound dog, the Hill s products mentioned are two-to-three times more profitable than a 12 month, nationally recognized heartworm prevention product. Note also the conservative nature of this illustration: assuming a larger dog, smaller bag sizes, or canned food would increase the practice profits from the Hill s products and widen the difference over the heartworm prevention product (as would less than 12 months of heartworm prevention). Of course, these products are not mutually exclusive - both should be used as appropriate to enhance pet health and longevity. You now know how to calculate the true profit impact of an entire product line or category in your practice! Figure 8. Earns X Turns Example with Two Hill s Products Compared to a Nationally Recognized, Veterinary Dispensed, Once-A-Month Heartworm Preventive. Forty pound dog. Hill s Prescription Diet Canine c/d (40# bag) Hill s Science Diet Canine Adult (40# bag) National Heartworm (6 monthly doses) Retail Price $74.99 $51.99 $53.74 Cost (to practice)* $51.72 $40.11 $26.87 Markup 45% 33% 100% Earns ($/purchase) $23.27 $11.88 $26.87 Turns (Purchase/year) The dog will consume either ~ five bags of the c/d Canine, or ~ six bags of the Canine Adult, and use the heartworm preventive all year (2 x 6 doses). Profit (Earns x Turns) $ $71.28 $53.74 *Based on Hill s June, 2012 Suggested Retail Price Sheet and Veterinarian Cost. Your progress is saved. Slide 13 of 19

14 Back to the Basics Back to the Basics Figure 9 compares the Hill s products mentioned above with a nationally recognized, veterinary dispensed flea and tick preventive product. As you can see in this example, the 40 pound Hill s Prescription Diet Canine c/d product is more profitable than the 12 month flea and tick control product, while the 40 pound Hill s Science Diet Canine Adult product is only slightly less profitable. Once again, this is an extremely conservative illustration as it assumes 12 month flea and tick control, and the very largest bags of the representative Hill s products. As with heartworm preventive, the flea and tick product is NOT mutually exclusive to the nutrition- ALL should be used as appropriate to enhance pet health and longevity. In the past, Hill s pet food product profitability has often (mistakenly) been underestimated compared to other products with a higher markup sold in veterinary practices. As you can now see, your role as a Veterinary Nutritional Advocate will positively impact not only pet health and longevity, but also the health of the practice! Your progress is saved. Slide 14 of 19

15 Back to the Basics Back to the Basics Figure 8. Earns X Turns Example with Two Hill s Products Compared to a Nationally Recognized, Veterinary Dispensed, Once-A-Month Heartworm Preventive. Forty pound dog. Hill s Prescription Diet Canine c/d (40# bag) Hill s Science Diet Canine Adult (40# bag) National Heartworm (6 monthly doses) Retail Price $74.99 $51.99 $94.98 Cost (to practice)* $51.72 $40.11 $47.49 Markup 45% 33% 100% Earns ($/purchase) $23.27 $11.88 $47.49 Turns (Purchase/year) (The dog will consume either ~ five bags of the Canine c/d, or ~ six bags of the Canine Adult, and use the flea and tick preventive all year (2 x 6 doses). Profit (Earns x Turns) $ $71.28 $94.98 *Based on Hill s June, 2012 Suggested Retail Price Sheet and Veterinarian Cost. Your progress is saved. Slide 15 of 19

16 Back to the Basics Back to the Basics Again, do NOT try and compare product profitability based on markup percentages! What other veterinary product or service brings clients through your door as often as the nutritional products you sell? None! After all, in general, dogs and cats eat every day. Nothing in a veterinary practice Turns as often as your nutritional products, and for our examples here, Hill s products. Also, recall from VNA Level III, Module 1: Business Realities that Hill s pet food products, unlike many veterinary products, are not seasonal; dogs and cats eat about the same amount all year long! And managing seasonality (or consciously generating more activity during the slower months) is one of the keys to productivity in a fixed-cost business. No veterinary product or service can generate client traffic for your practice like Hill s pet food products! As an advocate for the pet s best interest, consistently promote proper pet nutrition. Your progress is saved. Slide 16 of 19

17 Product Expenses and Productivity Product Expenses and Productivity Many veterinarians and practice managers wonder what percentage of overall gross practice income is appropriate to spend on products (drug and supplies including nutritional products). They may have heard various presentations, or read an article that veterinary drug and supply expenses should approximate 16 to 18% of a practice s gross income. BUT, recall that drugs and supplies are variable expenses - they are passed along to clients (or utilized in the practice) at a profit! Interestingly, strategies to minimize drug and supply expenses can actually negatively affect the profitability of a practice. There are very positive, ancillary benefits to pet food sales. On average, clients buying pet food in a practice visit twice as often and spend twice as much, utilizing other products and services for enhanced pet care. Frequent visits by pet owners mean better patient care and enhanced practice productivity. For example, look at the difference in revenue gained from a veterinary client who does not buy pet food from the practice, compared to one who does, (Figure 10). Revenue from the pet owner who DOES buy pet food from the practice is almost double! These types of clients visit the practice twice as often as those who buy pet food elsewhere. Every service business wants its clientele to interact with the business more often. What a great opportunity to enhance patient care and practice productivity, by advocating proper pet nutrition with Hill s products sold through your practice! Your progress is saved. Slide 17 of 19

18 Product Expenses and Productivity Product Expenses and Productivity Figure 10. Impact on Revenue of Pet Food Sales in Veterinary Practices. All Clients Clients with Pet Food Purchases (From the Practice) Average Revenue/Year $ 380 $732 (+93%) Average Number of Visits (Invoices) (+98%) Note: Of the extra $352 per client spent at the practice, less than $100 was spent of pet food sold from the practice. Ancillary products and services are also being utilized for better patient care. Source: Fritz Wood, CPA CFP via VetConnect, 2001 National Average Your pursuit of the continuum of care with compliance is also economically beneficial to the practice. Recall that in Level I Applications: What Are Our Clients Feeding Our Patients? you were asked interact with pet owners, finding out what they were feeding their pets, and some of the reasons why. Hopefully, you are still utilizing that form as a format to better understand client perspectives and where you can be most beneficial in promoting proper pet care. In thinking about your practice s entire population of dog and cat patients, can t you sense the opportunities? No doubt, they re phenomenal. In Level III, Module 8: Promoting Proper Pet Nutrition, we ll discuss just how incredible the potential is. Your progress is saved. Slide 18 of 19

19 Summary / Are you ready? Summary In VNA Level III Module 1 - Business Realities, you learned that veterinary medicine is primarily a fixed-cost business, and you realized the implications of a fixed-cost business. One significant implication is that variable expenses, (e.g. Hill s pet food product sales) are actually GOOD EXPENSES TO INCUR! Why? Because these items are conveyed to clients at a profit to the practice. Since veterinary practices sell these items for more than cost, money is available to help cover the fixed expenses. Minimizing variable expenses can actually cut overall practice profits. The KPMG Study provides the veterinary profession with statistically valid, independent research confirming the profitability of Hill s products in veterinary practices. Undeniably, a veterinary practice requires facility and labor resources to stock and sell Hill s products. Yet, that fact doesn t change the clear conclusion: Selling Hill s products is profitable and makes great business sense for your practice! You can feel even more comfortable knowing you are not only promoting proper pet nutrition in being an advocate for the pet s best interest, but that you are also contributing to the health of the practice, providing benefits for the entire veterinary health care team. Are Hill s product sales profitable? Absolutely! Are you ready? To continue, you will need to complete the quiz for this module. When you are ready, click on the forward arrow below to take you to the quiz. Your progress is saved. Slide 19 of 19

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