Retail Pricing Strategies, Part 2: Finding the Right “Magic Formula”

In part 1, I discussed my recollections as to how our industry has developed its retail pricing strategies, and how we responded to changes within the industry itself.

Progress requires change, and we needed to make changes that would enable us to keep our retail prices  competitive and still be able to pay our bills.  The rapid rise of wholesale prices could have led to a similar increase in what the patients paid for hearing aids, but we felt that would be  inappropriate.  Our practice’s old method of tripling the invoice just didn’t work anymore.  We progressed to pricing hearing instruments based on the type of technology (analog, digitally programmable, fully digital). But this strategy also failed once the mid-range and entry-level digital instruments entered the market about 15 years ago.  It was time to revisit what we were doing.

The pricing strategy that eventually worked best for us was a hybrid of the “invoice multiplier” and “fitting fee” methods.  We assessed our billable hours to determine our overhead cost of fitting any hearing aid, and then factored in the invoice aspect. This method kept prices reasonable on many accounts and, in my view, reflected the net benefit to the patient while also effectively covering our cost of operations.

I had at one point in my career worked for three years as a field representative for a manufacturer, and had seen various methods used by other practitioners to price hearing aids.  One common method was the “triple invoice” method. Just as common was adding a flat dollar amount to the invoice.  A third method, which I liked the least, was “tiered pricing,” in which providers grouped various manufacturers’ hearing aids into generic levels of technology so that retail prices were the same for all tier one products, the same for all tier two products, etc.

There were weaknesses with each of these systems. With the “triple invoice” system, entry-level products were too cheap and top-level products were too expensive. With the flat fitting fee methods, the opposite was true: Entry-level products were too expensive and top-level products were underpriced.

Tiered pricing worked to a degree, but it was often difficult to match up what each manufacturer offered. Worse, the invoices from Brand A to Brand B could vary significantly for equivalent products, so charging the same price for both didn’t make sense. Four-channel aids from three different manufacturers could have invoices varying by as much as $150 (e.g., one in the middle, one $75 more, one $75 less). So, how could we justify charging the same price for all three?

A HYBRID METHOD IS PREFERRED

My preferred method, which is a hybrid of the invoice multiplier (not three times) and fitting fee systems, seemed the most balanced. The only problem with my “magic formula”  (and a problem worth having) is that it requires me to analyze every product we offer, from every manufacturer.  As a result, I spend hours updating our price lists every time something new comes out, or revising it if current products get price reductions. However, the time investment is not a big deal to me; I can get a lot done while watching my favorite sitcoms and movies.

I group products into tiers, to a degree, but each manufacturer has a separate price list. If equivalent prices vary by $75, then the retail price varies as well, and intentionally for the benefit of the patient.  When we get a better price on a product, I am proud to pass that on to the consumer, which helps keep us competitive with other offices in the community.

My personal view is that each office should develop its own “magic formula” based on the invoice, their labor cost (billable hours) to deliver and maintain the product, plus any additional costs (batteries, etc.) that are included with the devices.  A combination of these methods seems, to me at least, to create the most balanced method for developing a retail price list.  You’ll probably find, as I did, that your formula will evolve over time, but the trick is to keep it consistent and make sure it works for your particular market and situation.  This also keeps it fair in regards to working with a variety of manufacturers to ensure your profit margins remain consistent as well.

In the next part of this series, I’ll review all of the aspects I take into account when sorting out the “value-added” portion of this, and also look at other costs that need to be monitored.