The price of a product or service is one component of the so-called marketing mix and the only one that produces revenue.
The other three (product, place and promotion) produce only costs. The Chartered Institute of Marketing observed that: ‘The impact of effective pricing on the bottom line is immediate and can be dramatic. Yet many pricing issues are often avoided, often because it is seen as too complex, too difficult.’
Accordingly, the task of setting prices is often handled poorly or illogically. It can, for example, be too cost-oriented or set independently of the rest of the marketing mix, rather than as an intrinsic element of an overall strategy. Setting the price of your dentistry is only the first challenge. This has then to be communicated to the patient. Who will do this, when and how will this communication be managed and so on? Next, when and how will the fees be collected?
In order to understand how pricing works, dentists must understand how people perceive prices and price changes, especially in relation to the provision of services.
Why putting a price on dentistry is different
If you are asked to estimate the price of, on the one hand, a box of rubber gloves or, on the other, an overhaul of radiographic equipment, you would probably be able to provide an answer for both on the basis of memory: the so-called ‘internal reference price’, which could be the last price paid or the price most frequently paid. However, with these two items, the gloves or the overhaul, which of your estimates do you think will be closer to the actual price? It is likely that your estimate for the price of the service (the overhaul) will not be as accurate as your estimate for the price of the goods (the gloves). Dentistry is a service too, and people have similar problems estimating the price of what we offer, knowing whether or not it is a fair price. There are a number of reasons for this.
Because services are largely intangible in nature and not created on a factory assembly line, service providers have great flexibility and can conceivably offer an infinite variety of pricing combinations and permutations.
Life insurance is a prime example of a service with a multitude of types and variations on offer. Only an expert customer, one who knows enough about the insurance industry to specify completely the options across providers, is likely to find prices that are directly comparable.
Of course, the large number of price comparison internet sites that have appeared in recent years has made much of this information accessible to consumers, but not significantly in the case of dentistry. So much of the care we provide is intangible. For example, the provision of complete dentures is not just the provision of an ‘off-the-shelf’ item but a bespoke product, the success of which is determined not only by the physical characteristics of the dentures themselves but also the clinician’s intangible ability to explain, motivate and encourage. There is also the highly intangible nature of the benefits as perceived by the patient. These are often emotional and relate to improved self-confidence and worth.
Lack of information
Another reason customers lack accurate reference prices for services is that many providers are unable or unwilling to estimate price in advance. In many cases, the fundamental reason is that the providers themselves do not know what will be involved until the process of service delivery unfolds, as for example in the case of a court trial. Similarly, a dentist can quote for the cost of a crown, but what happens if it is found during preparation that the tooth needs to be root-treated? Does the dentist pass on the cost to the patient who may now feel aggrieved at having to pay more than originally thought, or should he/she do what is described in the US as ‘eating the fee’? One could, of course, argue that the case should have been better planned or that the dentist should have managed expectations better by warning of the possibility of a need for root canal therapy. Perhaps it is unrealistic to warn patients of every possible complication, although on balance we feel that erring on the side of more information is the better approach.
Differing patient needs
Another factor that results in the inaccuracy of reference prices is that the needs of individuals vary. If you were to ask a friend the cost of a visit to a particular hair stylist, the chances are that your visit to the same stylist would be different. The same applies to dental care, only more so. Without a thorough explanation patients might find it difficult to understand why, for example, their orthodontic treatment costs more that that of their friend’s – to most patients, braces are braces.
Access to information
Another reason why customers lack accurate reference prices for services is that they feel overwhelmed with the information they need to gather. With most goods, retail stores display the products by categories to allow customers to compare and contrast the prices of different brands. With the growth of the shopping mall and the internet this process has become even easier. In dentistry, there is rarely, if ever, a similar display of services in a single outlet. If customers want to compare the prices charged by various dentists they must contact individual practices in person or by phone, and even then they may not receive the information they feel that they need, for all the various reasons discussed earlier.
Price as an indicator of quality
One of the interesting aspects of pricing is that consumers use price as an indicator of the quality of the service and not just its cost. Put another way, ‘price is at once an attraction and a repellent’.
The use of price as an indicator of quality depends upon several factors, one of which is the extent to which other information is available to the buyer. When other pointers to quality are readily accessible (the ability to touch and feel the quality of a Chanel suit, for example), when brand names provide evidence of a company’s reputation (the Virgin Group is a classic example) or when advertising successfully communicates the company’s belief in the brand (take the Volkswagen Audi Group), then customers may prefer to use those pointers instead of price.
In other situations, however, such as when quality is hard to detect or when quality or price varies a great deal within a class of services (such as dentistry), consumers may believe that price is the best indicator of quality.
A further factor that increases the dependence on price as a quality indicator is the risk associated with the purchase. In high-risk situations, and to most patients complicated dental treatment most certainly falls into this category, people will look to price as a surrogate for quality.
Because patients do often rely on price as a cue to quality, and because price does establish certain expectations of quality, the prices set must be determined carefully. So, as well as being chosen to cover costs or match competitors, prices must also be chosen to convey the appropriate quality signal. While pricing too high can set expectations that may be difficult to match, pricing too low can lead to inaccurate inferences about the quality of the care provided. This is why competing on price alone is a very risky strategy. It is difficult to imagine a dental practice, where the vision centres on the principle of lowest cost devoting the time and resources to implementing excellent service quality that will ultimately determine whether a person stays loyal to the practice.
Approaches to price setting
Three strategies are commonly used when setting prices, both in the business world at large and in dental practice.
1. Cost-based pricing
This is the most elementary pricing method, whereby a standard mark-up is added to the cost of the product or service according to the formula: price = direct costs + indirect (overhead) costs + profit margin.
In effect, the direct and indirect costs to be recovered set a floor to the price that may be charged for a specific product or service. It is the approach to pricing most commonly used by professional service providers (lawyers, accountants, dentists, etc), as well as many manufacturers.
It can be criticised, however, because it ignores current demand and competition and is unlikely to lead to the optimal price.
Cost-based pricing nevertheless remains popular for a number of reasons. Firstly, sellers are usually more certain about cost than demand; the pricing task is simplified and frequent adjustments are avoided as demand fluctuates. Secondly, where all the competing businesses use this method prices tend to be similar. Finally, and of particular significance to dentistry, cost-plus seems fairer to both buyers and sellers.
A major consideration for all providers of professional services is whether to charge hourly rates, irrespective of the work being done, or to adopt the fee-per-item approach, which is perhaps more familiar to dentists. Hourly rates are usually based on the principle of ‘target return pricing’ in which the business tries to determine the fee that would yield the target rate or return on investment. This is often advocated for dentists who aim for the level of earnings needed to support their lifestyle; the difference between this and costs then becomes the target return.
As with all forms of cost-based pricing, however, this method tends to ignore demand factors and competitor’s prices. Additionally, from a purely practical point of view, hourly rates can present problems in those situations where, for example, a patient arrives 10 minutes late for a 30-minute appointment. If, despite the patient being late, the job nevertheless is completed by the end of the original appointment the patient might still expect to pay for only 20 minutes of the dentist’s time.
Dentists probably feel more comfortable adopting a fee-per-item approach but should still be flexible enough to allow for items of special difficulty to be quoted individually. With this need for flexibility in mind, a growing number of dentists are using a hybrid approach that recognises that treatment plans and time allocation vary from person to person. It can be argued that such an approach provides a personal quote, with individual items priced within a free range that is openly accessible to patients and provides them with a clear understanding of the basis for the charges.
2. Competition-based pricing
The price charged by competitors for similar or substitute services may determine where, within the ceiling to floor range, the price level should actually be pitched.
The more information you can gather about the fees charged by your competitors, and the reactions of people to those prices, the easier it will be to establish where prices might be set. Such ‘going rate pricing’ is quite popular in professional services. However, since it is based largely on competitors’ prices with less attention being paid to cost or demand, copy-cat pricing usually fails to set the optimal price.
3. Demand-based pricing
The approaches to pricing dental care described so far are based on the dental practice and its competitors, rather than on patients.
A third approach to pricing involves setting prices consistent with patient perceptions of value; prices are based upon what patients will pay for the services provided.
Demand is the result of the consumers’ perception of value. The nature of any transaction, whatever the product – tangible goods or intangible service, is such that customers make judgements about what they get in return for what they give. The management concept of differential advantage holds that the best performing organisations are those that offer the greatest customer value and are able to sustain that value over time.
Perceived-value pricing sees the buyer’s perception of value, not the seller’s cost, as the key to pricing. It allows for the use of non-price variables in the marketing mix to build up perceived value in the buyer’s mind. Price is then set to capture the perceived value. Perceived-value pricing fits well with modern marketing thinking, which sees products or services being developed for particular target markets with planned quality and price.
The key to perceived-value pricing is to determine the market’s perception of the offer’s value accurately. Sellers with an inflated view of the value of their offer will overprice the product. Alternatively, they may underestimate the perceived value and charge less than they could.
Clearly, market research is needed to establish the market’s perception of value as a guide to effective pricing.
To understand this in terms of dental practice, one must consider what exactly is being sold. For example, are you selling the crown itself or the benefits that accrue from that crown?
Salisbury dentist Charles Lister puts it this way: ‘We are selling our professional services, not items of treatment. The patients pay our fees for the benefits they receive in return – good dental health, dental well-being, comfort, nicer smiles and not the mechanics of how this is achieved.
‘We therefore need to set our rates accordingly, to allow us to live comfortably, have enough free time, time for planning and administration, and to show a profit that allows re-investment for the long-term benefit of our practices and our patients.’
Communicating the fee to the patient
Whichever approach is chosen, the dentist is still confronted by the dilemma of choosing the most appropriate way and time to communicate the prices to the patient.
If you have followed our arguments so far, you will see why, along with a growing number of dentists, we believe that prices for individual items of treatment should not be shown to patients even if they are the basis upon which the fees have been set. Instead, the patient is quoted a global sum with the actual price list merely used as a reference by the dentist.
Well-known private practitioner Barry Posner says: ‘Don’t hand out prices to all and sundry. How many patients will understand anything more than a very simple description which will fall short of describing and valuing a very high-tech procedure.’
What is especially clear is that patients do prefer to know the cost implications as early on as possible and do not appreciate going through a course of treatment oblivious of the bill that will be facing them at the end of treatment.
It has been suggested that dentists have difficulty with both set fee scales and hourly rates because they have not convinced themselves that their fees offer value for money for high quality dental care.
Back to Barry Posner: ‘Ever been on the phone, answering a query and swallowing hard before you force out the words £2,000? Fear of rejection? Don’t say it, read it. It is very much easier.
‘Don’t say “about….’ to soften the blow. Don’t ever say “I’m sorry but…”. Harrods doesn’t label carpets in its window with: “We’re sorry but these carpets are about £5,000 each”. All this stems from Colin Hall Dexter’s neuro-fiscal drag. Your brain thinks 1,000 and your voice says 500.’
Setting fees may, in fact, be the easiest part. Where most dentists come unstuck is in their failure to define and then implement a strict collection policy.
Collection is a huge issue in dental practice and one that is paid only scant attention. American practice management guru Dr Rick Kushner says that collection policy is one of the cornerstones of successful practice, noting that most practices have a billing policy but not a collection policy.
In relatively complex cases, for example, he advocates offering patients a number of alternatives such as a cash discount for full payment up-front or a pay-as-you-go option, with payment due on each day any particular component of the treatment plan is provided, before the patient enters the surgery.
Most people feel that a full payment – made pre-treatment and perhaps with a discount – is the most favourable option (despite the aforementioned problem of how to deal with unforeseen treatment needs) in that it eliminates the risk of bad debts and makes patient attendance and compliance more likely.
Kushner warns that pay-as-you-go is more fraught with problems. Primarily, the situation can arise where the patient attends but doesn’t bring any money and ‘forgot’ the cheque-book. The temptation is go ahead and carry out the treatment and then bill the patient for the money owed. This, says Kushner, is a fundamental error made by many dentists. He advocates the dentist informs the patient that the work cannot be done that day and recommends they re-schedule the appointment. Kushner’s argument is that most dentists do too much work effectively for free and end up with poor collection rates and ensuing bad debts, something he terms ‘overproduction’.
He says: ‘I am a big supporter of positive internal marketing or patient relations, yet I have this hard-nosed collection policy. Not so. It is a firm, but fair, policy, and we know that the hard feelings develop when dentistry is done and then we “hound” payment. When it is all tied up neat and tidy, the patient relations remain strong.
‘You know what else? Patients like the dentistry much better when it’s paid for. Go through your account cards or your software and identify which patients are not active… those who owe money!’
This is clearly quite a controversial approach, one that has made Rick Kushner a rather controversial figure in the US. Nevertheless, he is someone that at least deserves to be listened to.
With bad payers:
• Be sure to include payment terms in your business literature
• Repeat your payment terms in any treatment plans
• Remind clients to bring payment means with them prior to a fee-paying appointment
• Have automated payment facilities on-site (credit cards)
• If they fail to make a payment on the spot, send the invoice with a self-addressed envelope. Include on the invoice a paragraph to say that your normal terms are 30 days and that in excess of 30 days there will be an administration fee payable. Also add the phrase ‘please help small businesses by paying promptly’.
For broken appointments:
• Spell out your terms and conditions clearly in your business literature – then people don’t have the right to complain
• Many practices tell patients that if they cancel with more than 24 hours’ notice there will be no charge. We ask, what is so special about 24 hours? It is still disruptive and so now an increasing number of practices request credit card confirmation of all appointment bookings and suggest that a cancellation fee will always be charged unless there is a ‘genuine’ emergency, when discretion will be used. This will catch persistent offenders
• Within 24 hours you are granted one free missed appointment per year
• Every time after that you pay the cost of each missed appointment.
In practice, most dentists will include elements of all three approaches to pricing described in this article. Whichever one predominates, constant monitoring of costs and competitors’ and patients’ response to fee scales must be carried out. In a free economy, only by maintaining a flexible approach to pricing can you be sure of setting fees at an optimal level.