Valuebased Pricing: Adjusting Fees Based on Values of Bovine Veterinary Services

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Value-based Pricing Adjusting Fees Based on
Values of Bovine Veterinary Services

• Floron C. Faries, Jr., DVM, MS
• Professor and Extension Program Leader
• Texas AgriLife Extension Service
• Texas AM System
• College Station, TX 77843
• http//extensionvetmed.tamu.edu

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Integration

• Consultation services
• Technical services
• Product sales
• For services and products to be cost-effective

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Financially Benefit Veterinary Practices
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Financially Benefit Clients Operations

• Enhance productivity of animal populations
• Increase profitability
• Increase economic efficiency

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Money Is What Production Medicine Is All About

• To the veterinarian
• To the farm

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• Implement cost-effective
• Health management practices

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• Think population
• Think production
• Think profit

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Basic Philosophy Is Do Enough

• Of the right things
• At the right time
• To improve production and profits

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Help Producers Run Efficient And Profitable
Operations

• Recognize effective production practices
• Diagnose inefficiencies
• Prescribe corrective action

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• Promote profitability
• Evaluate production and financial performance
• Provide information and advice
• Provide the best service

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Identify The Veterinarians Mission Statement

• Practice production medicine for animal
  populations
• Interest and desires
• Special competence and talents

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• Help clients achieve production goals
• Tailored use of latest technology
• Keep producers in business

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Identify The Clients Mission Statement

• Implement production and environmental health
  management practices
• Interest and desires
  
  

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• Foster health of an animal population unit
• Enhance productivity
• Increase profitability
• Increase economic efficiency

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Establish The Veterinarian-client Relationship

• Full cooperation and desires
• A business and friendship

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• Veterinarians time cost money
• Veterinarian must receive adequate compensation
• Veterinarian must make a profit
• Veterinarian must provide cost-effective services
  and products
• Veterinarians services and products must be
  profitable to client

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• Veterinary practice
• Ethical
• Responsible
• With respect
• With caring attitude

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• Prevent lay drug distribution from undermining
  VCR
• Keep prices current
• Keep prices competitive
• Maintain or access drugs, biologicals, and
  supplies

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Maintain Continuing Education

• Be knowledgeable and comfortable
• Bovine industry
• Vertical integration
• Horizontal integration

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• To relate to implementation of practices
• To relate to cost-effectiveness of practices
• Listen to clientele
• Participate in lay organizations
• Read their publications
• Attend their seminars

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• Participate in professional organizations
• Read their publications
• Attend their seminars
• Continuing education is a must

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• Receive new and advanced technology
• Receive basic understanding of financial
  statements and accounting systems
• Develop skills
• Team work
• Goal planning
• Finance, accounting, and economics
• Decision-making

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Achieve The Clients Goals

• Help client achieve production goal
• Improve production
• Help client achieve profitability goal
• Improve economic efficiency
• Reduce unit cost of production

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• Define a goal
• Identify objectives
• Applicable to a goal
• Impact on profit and efficiency
• Attainable and measurable
• Integrate production and finance
• Identify performance measures

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• Establish individualized health management plan
• Integrate new and advanced technology
• Population animal health
• Nutrition
• Genetics
• Production records

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• Reproduction
• Environment
• Marketing
• Financial records

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• Establish integrated team of specialists
• Private veterinarians
• Public veterinarians
• University personnel
• Diagnostic laboratory personnel
• Allied industry personnel

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• Nutritionists
• Accountants
• Bankers

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• Make recommendations
• Measurable
• Collect data
• Evaluate, analyze, and quantify
• Assess impact on objective and goal

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• Provide latest technology
• Counseling
• Consulting
• Outreach education
• Evaluate new information
• Determine profitability of services and products

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Evaluate Services And Products Provided

• Integrated team
• Periodic reviews
• Qualified accountants
• Determine cost-effectiveness of practices for
  producer
• Decision support tools
• Integrated services and products

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• Responses to practices
• Response to input is positive
• Response to input is zero
• Response to input is negative

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• Return exceeds cost
• Return equals cost
• Cost exceeds return
• Evaluate compensations for veterinarian

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Implement Marketing Strategies

• Sell production medicine
• Relationship
• Commitment
• Communication

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• Develop relationship in bovine industry
• Extension
• Associations and organizations
• Exhibitions and sales
• Provide client education
• Be a communicator
• Be an educator

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• Participate in outreach education
• Bovine industry seminars
• Client seminars
• Publications
• Mass media

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Value-based Practices

• Producers know the same old stuff
• Producers need latest technology
• Advice
• Services
• Products

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• Veterinarian must integrate services and products
• To be cost-effective
• Veterinarian must turn data (cost) into value
• Use in management decisions

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• Veterinarian must make a profit
• Producer must make a profit
• Think population, production, and profit

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• Objectives
• Maintain and improve animal health and well-being
• Control disease and improve production
• Produce at the most efficient level
• Biological efficiency

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• Maintain and improve productivity of the farm
  business
• Ensure actual production meets expectations
• Obtain optimum production
• Biological efficiency

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• Maintain and improve profitability and economic
  efficiency of the farm business
• Focus on financial performance of the farm
• Provide maximum economic returns

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• Maintain and improve hygiene of the farms
  production
• Produce wholesome food at a reasonable price to
  the consumer
• Produce wholesome food yielding a net profit for
  the producer

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• Determine producers goals, values, and needs
• Develop objective criteria that can measure
  progress and results in a population
• Integrate health management plans with production
  management
• Create data bank for production planning and
  prediction
• Conduct statistical and financial/economic
  analysis for simultaneous measurement and
  assessment

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Suboptimal Performance

• Clinical disease
• Sub-clinical disease
• Management inefficiency/inadequacy

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Success

• Quality of producers management skills
• Producers desire and ability to comply with
  veterinarians recommendations keeping good
  records/record system
• Monitor health events
• Monitor levels of production
• Monitor incidence of disease
• Compare targets of performance

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• Integration of health and production management
• Identify problems
• Formulate cost-effective corrective actions
• Apply information to solutions
• Evaluate responses
• Make data-based management decisions
• Make decisions based on comparisons of other
  farms

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• Place more emphasis on management factors than on
  treatment of disease
• Production economics
• Nutrition
• Reproductive performance
• Housing and environmental management
• Clinical epidemiology
• Infectious disease control
• Marketing

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• Computing data analysis
• Based on selection of parameters required to
  monitor performance accurately
• Report results back in numerical and financial
  terms
• Provide financial values for measured production
  gains

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• Report warnings of deviations from set targets
  and goals
• Production performance
• Disease prevalence
• Resulting in economic benefits
• Consider costs and benefits of veterinary
  services
• Whether the expenditure provides the best
  economic return
• Veterinary services do not have a cumulative
  benefit

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• Producers purchase goods and services based on
  their cost and the potential return generated by
  their use
• Limited information on economic benefits that can
  be realized from production medicine
• Economic impact of medical decisions is not
  certain in most cases
• Paucity of data
• More cost effective as populations become larger

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Costs

• On-farm professional services
• Data analysis and report preparation professional
  time
• Drugs, vaccines, and supplies
• Travel
• Telephone charges

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Traditional Fee Methods

• Charge per professional hour (hourly fee)
• Charge per head per unit of time (annual fee per
  animal)
• Contract charge for all professional services
  (annual salary)
• Percentage of profits possibly included
• Additional charges for supplies, travel, and
  telephone

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Traditional Fee Basis

• Cost-based pricing
• Charge based on cost of professional services and
  products
• Market-based pricing
• Charge based on demand and difficulty of
  professional services

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Targets Of Health And Production Performance

• Optimum levels that yield the best economic
  returns on investments
• Related to purpose, not to disease

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Shortfalls In Performance

• Performance-related diagnosis (inadequate
  performance)
• Differences (deviations) between targets
  (expected levels) of performance and actual
  performance
• Interaction of management, environment, animals,
  and pathogens

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Mathematical/Statistical Techniques For
Production Medicine

• Mathematics is a tool
• To summarize and clarify data
• To test the truth of conclusions
• Mean
• Standard deviation (variance, estimates of risk)
• Confidence interval (attitudes to risk)
• Confidence level
• To quantify the financial impact of biologic
  events

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Decision Analysis For Production Medicine

• Decision analysis is a tool
• To help ensure that appropriate decisions are
  made
• Systematic decision tree process
• Graphic model for probabilities of expected
  outcome events (values)
• To determine potential economic impacts of
  choices ( interventions)
• Quantitative approach to decision-making process

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• To determine break-even points between decision
  sequences
• Sensitivity analysis (technique)
• Break-even curves compare two intervention
  strategies
• Break-even curves examine value of intervention
  over nonintervention

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Partial Budgets For Production Medicine

• Standards for production effects (outputs) are
  unacceptable due to variability in environment,
  animal, and management.
• Projection
• Project the nonstandard value of a program
  strategy in the future
• Regarding effects of disease and management on
  productivity
• Specify courses of action and responses
• Make income and expense projections about the
  outcome of an event

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• Demonstrate the effect of factors in monetary
  terms
• Value all implications of a change
• Increase the amount of each input until the last
  additional unit produces the same value in output
• Point of maximum benefit
• Each subsequent unit, cost exceeds return

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Comparison

• Compare the nonstandard values of two or more
  programs (economic comparisons)
• Current program values
• Proposed program values

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Costs Of Disease (Economic Effects) In Production
Medicine

• Biologic effects
• Reduced productivity and efficiency
• Express morbidity, mortality, and production loss
  in physical units
• Express morbidity, mortality, and production
  loss in dollars at current market price
• Low animal value, little consequence
• High animal value, catastrophic impact

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• Increased preventive and therapeutic inputs
• Drugs, chemicals, vaccines, and supplies
• Veterinary services
• Increased labor inputs

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Control Of Disease In Production Medicine

• Increased revenues
• Increased reproductive efficiency
• Increased amount of product
• Improved weight gain
• Improved feed efficiency

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• Decreased revenue losses
• Reduced deaths
• Reduced culling rates
• Reduced market channel loss
• Reduced genetic value loss

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• Reduced expenses
• Decreased veterinary service costs
• Decreased drug, chemical, vaccine, supply costs
• Decreased feed costs
• Decreased replacement animal costs
• Decreased labor costs

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Economic Analysis/Veterinary Economics In
Production Medicine

• Economic analysis is a tool
• To evaluate the past
• To quantify or describe the present
• To predict or plan the future
• To conduct repeated cost/benefit analysis
  (technique)
• Economics is about making efficient choices (a
  science of choice)
• Accountancy is about calculation and
  interpretation of financial values

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Forecasting is like trying to drive a car
blindfolded, following directions given by a
person who is looking out of the back window.

• Types
• Partial budget
• Decision analysis
• Capital budget
• Simulation

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• Measures
• Reveals approximations
• Involves assumptions

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Objectives

• Determine losses
• Economic impacts
• Biologic impacts
• Draw conclusions
• Recommendation for action
• Solution to a problem

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• Determine motivation to increase production and
  profit
• Reduce risk
• Predict bad outcomes (probabilistic and low
  visibility)
• Utilize minimax approach
• Minimize the chance that the maximum bad outcome
  occurs

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• Set time horizon
• Determine time limit within which economic
  analysis is made
• Determine revenues (outputs)
• Calculate value of product
• Product times price
• Little control
• Determine production effect of a program
• Low visibility

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• Determine expenses (inputs)
• Types of costs (most control)
• Fixed costs, costs regardless of which choice or
  action is taken
• Costs regardless of production level
• Variable costs, costs depending on what actions
  are taken
• Costs vary with production level
• Costs dependent on production level

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• Cash costs, costs annually for purchased inputs
  (high visibility)
• Opportunity costs, costs by not making some other
  choice
• Return foregone by not using resources elsewhere

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• Calculate profit of farm before and after
  interventions
• Revenue (output) - expenses (input) profit
  (VALUE)
• Calculate net increase in profit of farm after
  interventions
• Calculate percentage increase in net profit of
  farm after interventions

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• Calculate economic efficiency/performance of
  interventions
• Revenue (output) expenses (input) efficiency
  (VALUE)
• A criterion to use in judging the desirability of
  alternative methods
• Benefit cost ratio (rate of return)
• Should be greater than 1
• Rates of returns not cumulative

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• Calculate economic efficiency of farm before and
  after interventions
• Calculate net increase in economic efficiency of
  farm after interventions
• Calculate percentage increase in economic
  efficiency of farm after interventions

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Value-based Pricing In Production Medicine

• Objectives
• Be involved in decision-making process in farm
  business
• Learn to evaluate economic benefit of
  interventions
• Demonstrate their impact
• Document value of technical and consultation
  services
• Be compensated on financial improvement and rate
  of return

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Fee Basis

• Charge not based on cost of professional services
  (cost-based pricing)
• Charge based on values of professional services
  (value-based pricing)
• Net profit payment
• A percentage of net increase in profit of farm
  business
• Net increase in profit in response to a choice
  (intervention)
• Percentage increase in net profit x net increase
  in profit interest FEE

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• Marketing justifications
• Degree of difficulty
• Degree of demand/scarcity
• Increase in economic efficiency
• Hourly fee fee hours spent

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