Retail Pricing Strategies, Part 4b: Loyalty and Ethics

Scot Frink
March 12, 2012

Art by Christopher W. Frink

This series of articles on pricing strategies has analyzed the historical perspective on the development of retail prices, discussed finding your own “magic formula,” and looked at the individual considerations that should be a part of that formula (e.g., warranty, invoice cost, accessories, cost-of-living adjustments).  Two weeks ago, I began the topic of using manufacturer loyalty programs ethically, specifically for the benefit of the patient.  In this post, I’ll discuss business development funds in relation to pricing strategies, and how you can use them ethically to directly benefit the business, and thereby indirectly benefit the patient.


Business Development Funds and Retail Pricing

One of the most common loyalty program features I’ve seen is a business development fund (BDF). The way this usually works is that if you hit a quarterly or annual target for units with the manufacturer, you get the equivalent of a rebate on your total invoices. I consider this to be essentially the rest of the discount. For government-related third-party fittings (e.g., Medicaid), it is actually illegal to receive these funds, so for my own office we order the hearing aids on a separate account from our normal one where BDFs are not earned.

For private-pay patients, however, I factor in the BDFs when setting my pricing formula. I don’t further discount the product, but rather make it so that for those manufacturers whose BDFs I do not qualify for, I add in an equivalent percentage matching the amount I would get if I had ordered the hearing aid through the loyalty manufacturer. In other words, if my leading manufacturer gives me a 9% rebate on the invoices for non-government orders, I also add in 9% of the invoice to all other manufacturers. In this way, I earn the same margin regardless of which brand I choose to work with.

So why does this make it ethical? Because it levels the playing field, and because it is the best solution for the economics of my office. If my primary manufacturer offers me a BDF, but I feel the patient would be better served by a different manufacturer’s product, I can provide the most appropriate hearing aid and still earn the same margin, thus ensuring my long-term bottom line. This is in the best interest of my patients since if I am not profitable, my doors can’t stay open and I will no longer be there to serve them.

As an example, remember those free accessories I mentioned earlier? Well, I love it when a manufacturer I’m working with contacts me and asks  “How can we get more of your business?”  This recently occurred, and the manufacturer in question looked at what one of its competitors has been doing with us with the free accessories, and they’re now providing them as well! Did it influence our staff? Yes. To the detriment of the patient? Absolutely not! Now the patient has even more options available, the playing field is more even, and they benefit the most by the competitive nature of the manufacturer.

For the third part of this topic (out in four weeks), I’ll discuss how loyalty programs can be utilized internally to ethically benefit the practitioner and the patient.  But before that, I’ll be doing a special post relating to attendees at AudiologyNOW in Boston–my fellow OtoGeeks!

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