Retail Pricing Strategies, Part 3: Making Everything Count and Counting Everything

Before we get started, I want to note that in the course of writing this post I kept stumbling across ideas for future posts (those “a-ha!” moments).  For the fun of it, I’ll throw in a few number signs (#) indicating those moments, and if you’re interesting in my pursuit of them, please send me an email or post a comment. I’ll keep it in mind, particularly if there is substantial interest in a specific topic.

In part 2, I reviewed a few formulas I have used to come up with retail pricing, from “triple invoice” to “invoice plus fitting fee” to a hybrid between the two, which seemed to work best.  For me, the multiplier and the fitting fee is based on my billable hours for the time it takes to conduct the fitting, follow-ups, and long-term service.  But is that it?  Is it that simple, or is there more to it?

Of course,it’s not all that simple.  The invoice and the fitting fee are the simple aspects.  From there, it’s looking at other costs that go to make a successful fitting that need to be bundled into the rest of the retail cost (#1: unbundling!). That’s not at all simple.

 

FACTORING IN LONG-TERM SERVICE

Regarding long-term service, how often and for how long can the patient come in for it and not expect a charge?  Originally, our practice included basic maintenance throughout the warranty period at no charge, and then charged a very small fee for out-of-warranty service.  Since our early days, we had a full-time repair technician on staff (today, we’d call him an “audiology assistant”; idea #2).  He would take care of the basic maintenance on instruments—cleaning aids, retubing earmolds, etc.  Since the audiologist wasn’t doing the work, it was much more cost-efficient and became a huge convenience for our patients.  Approximately ten years ago, to be more competitive, we decided to do away with charging any fees for basic maintenance, even if the aids were out of warranty.  As the old axiom goes, there is no such thing as a free lunch, so I factor in a fee based on the service term of the warranty to account for our cost to maintain this level of service.

For the hearing aid’s warranty, I like a tiered method depending on the level of technology, anywhere from one year for economy products to three or four years for elite products.  Some manufacturers send the instruments to us with a fairly basic warranty, typically one year.  Others send their better products with longer warranties, often at no additional charge.  When negotiating with them regarding their perennial question of “how can we get more of your business,” a better warranty for the patient can come into play, which indirectly influences the retail price (#3: negotiating with manufacturers).  While we may get the longer warranty at no charge, we still have to service it for free, driving up our cost of operation.

 

WHAT ABOUT THE “EXTRAS”?

At this point, we’ve accounted for the cost of the product and our cost to service it. But what about the “extras”?  The most common extra that practitioners include with a hearing aid purchase is batteries, anywhere from a single starter package to batteries for the life of the instruments.  I have had significant conversations with battery manufacturers about battery clubs. And while manufacturers often promote the concept to practitioners, they feel that few offices actually offer a comprehensive program like ours. We have over 1400 persons in our battery club who receive at least one package of batteries in the mail on a monthly basis (topic #4:  battery clubs).

How did we get so many to join?  Every purchaser of new hearing aids gets signed up for our program, included with purchase.  We include 36 cells per aid with purchase, and send out one 6-pack per month.  When they receive their last package, we include a renewal form, and we have a 30% renewal rate.

Similar to batteries are devices or internal options necessary for the appropriate function of hearing aids:  earmolds and telecoils.  Remember the line-item invoices we used to receive from manufacturers for analog instruments?  I remember haggling with suppliers over the cost of trim pots.  Thankfully, with our computerized hearing aids, we no longer have to deal with them.  But not all patients can be open-fit with behind-the-ear instruments, and an earmold is therefore necessary.  While BTEs frequently come standard with telecoils, I often have to request a telecoil at an additional charge for custom products (and maybe more if it is to be automatic).  I usually find the cost balances out for earmolds on BTEs and telecoils for ITEs, but I add our retail amount to the cost of the hearing aid (topic #5:  earmold pricing).

What else could be included?  It depends on your philosophy.  We’ve tried a few options that you may also have tried:  dehydrating systems or needle vacuum systems to minimize repair issues; auditory training software for the patient to do self-administered aural rehabilitation; field loop systems for enhancing television performance, etc.  These have all, at one point or another, been factored into the retail price.  But when the economy took a turn for the worse in 2008, we decided on a stripped-down approach and eliminated these fringe items to go for a more streamlined and competitive price.  Hopefully, in the future, we can return to encouraging our patients to use these devices to enhance their communication. But I believe that this will only occur once the economy improves or some other development changes our situation.

 

SOMETHING OFTEN OVERLOOKED:  Cost of Living

Times change, and so does our cost of operations.  While the billable hour aspect of your retail price can be adjusted annually, remember that this is simply your costs to meet your expenses.  But if the cost of living goes up, you should account for that as well.  We can’t keep operating on old profit margins, and have to move on to higher levels to accommodate a changing industry.

At our office, we give our employees annual cost of living raises.  In Oregon, it is easy to find, as our local minimum wage is adjusted annually based on the local cost of living.  In order to help cover this raise, we increase the margin on the product accordingly.

As an example, in 2011, our minimum wage was $8.40, and for 2012 it is now $8.55–an increase of about 1.8%.  So, to help our employees to keep up with inflation, everyone gets a 1.8% raise, and our margin gets raised accordingly.  As an example, if a product had an $800 margin, we raise the margin by about $14.  But we like rounder numbers, so I typically will then round it to the nearest $25 increment ($800 => $814 => $825).  If, the next year, it increased by about the same amount, I still round to the nearest $825 (i.e. $814 => $829 => $825).  Since this is the margin and not the retail price, our retail doesn’t outpace inflation, and we keep competitive, but the raises for our employees are covered.

So what have I left out? One factor that is a huge topic to cover is how to factor in manufacturer loyalty programs in order to maintain a balance of fairness among product lines, as well as to resolve any ethical concerns about these programs and to maximize the benefit to the patient. I will address that topic in the concluding part of this series.


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