It’s important to note they used the national inflation rate only to calculate their maintained profit in constant currency; for all other items they used specific data. The required gross margin – €828 K – means that PremiumVet needed a gross margin that is 7.5% higher than in 2022 to maintain an equivalent net profit for the partners.
In front of that, the practice increased prices by only 3.1% on a full year basis (2.5% on January 1st and 2.5% on October 1st) although the level at December 31st will be 5% higher than a year before*.
*To be absolutely accurate, two consecutive 2.5% rises in prices result in a 5.0625% rise (1.025 x 1.025) and if the first one is applied from January 1st and the second one from October 1st, the average rise is 3.14% (2.5% x 3/4 + 5.0625% x 1/4).
2. What is an appropriate level for their service prices in 2023?
Considering PremiumVet prices are adequate – i.e., consistent with its market positioning – the simplest method to update service prices is to increase each of them by 7.5%. Nevertheless, the partners may decide to increase some of them by more than this if they think it’s needed and/or possible, and others by slightly less only if it’s absolutely necessary (for instance if the fees charged by other local veterinary practices are competitive), provided that, on a weighted average – taking into account the volume of each service – the increase reaches at least 7.5%.
Of course, the two partners agreed to keep an eye on the situation throughout the coming year, and to be ready to move again as the situation required. After all, their decisions for January’s price adjustment are only able to offset the last part of 2022’s actual internal inflation and barely include the minimum anticipated for 2023.
3. How should the issue of product pricing be addressed?
When it comes to setting product prices, the two examples given show two opposing situations. The purchasing price of Product A is to rise by only 3.3% in a category which is not affected by any major competition, whilst the price of Product B is expected to rise by 25% in a category heavily exposed to alternative channels.
If PremiumVet sticks to its previous strategy and applies its usual mark-up rates (1.8 for Product A and 1.4 for Product B), the practice will only increase its gross profit by an additional 80 cents, or 3.3%, for Product A. For Product B the increase in gross profit would be an extra 6€, which is a 25% uplift. In the first example, the price increase is below the required 7.5% rise in gross margin to maintain an acceptable level of profit (as calculated in Table 3) and will not optimize the opportunities offered by low competition. In the second example, the price adjustment will exceed the gross margin objective but exposes the practice to the risk of losing sales to competitors.
A better alternative would be to increase the gross margin made on each product by 7.5% – so for product A, take the 2022 gross margin of 24€ and increase it by 7.5%, which gives a new gross margin of 25.80€ and therefore a selling price of 56.80€ (31 + 25.80); for product B, the same 7.5% increase would give a selling price of 100.80€ (75 + 25.80).
However, an even better option would be to then adjust the final pricing from this basis considering the specific competitive context. Table 4 sums up the pricing options using the practice’s “standard” mark-up rates and by using a 7.5% increase on gross margin, and presents the final decisions Jane eventually proposed to Kevin.