Beyond cost-plus pricing
Market, customer demands can determine charges
You’ve decided what new private duty service you’d like to offer. (See December 1998 Private Duty Homecare, p. 163.) Now, what do you charge for it? Some providers add administrative and overhead factors to their direct cost of care to arrive at a price. To determine personal care service rates, for instance, they would start with the $7.50 per hour in salary and benefits paid to caregivers. To that, they would add a $1.50 per hour overhead factor to cover scheduling, supervision, and billing costs. Finally, they would include a $1.35 per hour markup to meet their 15% net income goal, arriving at a $10.35 per hour charge.
Such a methodology may be appropriate in some instances, but in others it may cause you to either price your service out of the market or undercharge, according to John Richter, CPA, principal with Larson, Allen, Weishair & Co., a health care consulting firm in Charlotte, NC. He recommends using three variables to determine pricing:
• market demand;
• customer needs;
• third-party contracting parameters.
"Knowledge of your costs is essential, but you have to understand what’s in your market. Some services may have a 5% markup, while others, where you’re offering something dramatic and unique, may have one that’s 50%. It really gets down to a philosophy of thinking in terms of the market place instead of cost plus," Richter says.
That marketplace mindset translates into new terminologies and new methods of operating. "My most successful private duty clients operate like retail stores. They don’t do financials on a monthly basis, but instead set weekly growth measures and targets," Richter says.
They also think in terms of revenue and sales instead of reimbursement, and customers instead of clients and patients, he adds.
Many providers emphasize the quality of their services, and use that as a justification for their pricing structure. However, "Quality in health care is very difficult for consumers to distinguish unless there’s a negative reflection in the media or community of the provider. Absent that, quality is perceived to be the same," explains Richter. It is an especially hard sell for highly competitive services.
Determining the right price for your service requires "a constant awareness of what’s happening in the marketplace. Use information that customers switching companies tell you, telephone inquiries, and published rate sheets of competitors," Richter advises.
Also, look at other measures such as operating efficiency and customer satisfaction. Know how well your service stacks against the competition. "A good operator knows what they’re particularly good at through their assessment process of quality, operating efficiency, and customer service," he adds.
Other factors that affect pricing include the uniqueness of a service, its relative newness in the market, the number of competitors, and the visibility of the service. (See Pricing Decision Questions, below.)
Unique services usually demand higher prices. "If the competition is not providing it, or if it’s in a way that’s so exceptional that clients are referring to you, you can increase the price," he says. "Your most recent performance will tell you. If you’re fast growing and few are providing it [in the same way], then [you can charge more]."
New services or those opening in new territories may have the most competitive prices. Sometimes providers competitively price certain services in the hopes that when a customer has other needs, he will consider using services that are more profitable, Richter notes.
No service should be unprofitable in the long run. There should be no loss leaders, Richter advises. If your service is priced competitively and is unprofitable, closely scrutinize the operations.
"You need detailed cost management reports to assess the organization and either increase productivity or decrease administrative expenses," he says.
Don’t scrimp on labor costs. "If you pay lower rates and no benefits, you will have a higher profit margin in the short run. But in the long run, you may not be able to provide the service. As soon as profitability becomes an issue, and you’ve done everything you can to be profitable, then you need to make a serious decision about whether you can reasonably continue to offer the service."
Source
• John Richter, CPA, Principal, Larson, Allen, Weishair & Co., 128 N. Tryon, Suite 1310, Charlotte, NC 28202. Telephone: (704) 377-6532.
Pricing Decision Questions
• Do you have clearly defined marketing strategies?
• Do you know your service’s position in the market?
• Do you know your target audience?
• Is your market changing?
• What does the market want or need from your service?
• Is the service price sensitive?
• Is the visibility of the service high or low?
• Do you know the unit costs of providing the service at the desired level of quality?
• Will a change in price increase volume?
• Do you know the variable cost of the service?
• How will volume affect the cost per unit?
• What is the competition doing and thinking?
Source: Larson, Allen, Weishair & Co., Charlotte, NC.
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