4 Simple Lessons About Pricing

Todd Sattersten, author of Four Simple Lessons About Cost, Price, Margin and The Options Available to The 21st Century Business, was a guest on my radio show recently.  (You can listen here.)

I asked him:

What are the 4 simple lessons about cost, price, margin and the options they create now for 21st century business?

Todd answered:

If you are in business you concentrate on these things:

1. Costs - Costs are always going down. You have to manage with that. For the last 20 years the costs of hard drives have gone down 5% per quarter.

2. Price - Price is a signal. One concept I talk about is anchoring and you can sway someone’s perception about cost or product by anchoring them with a number beforehand. For example retail price tags: here is the old price- here is OUR new price.

3. Margins - Margin is when you connect price and cost together. It is the most important measure in business. It is like your weight. How many calories are you taking in versus how many you are burning tells you where your weight is at. You have control over price and costs.

4. Options - You Have Options. There are more ways than you realize how to go to market. Price discrimination is a way to create different price points for the consumer.

Time is another point. I am trying to connect all the commercial aspects of business together: sales, customer service, purchasing and pull these into one bundle and say you have many options and flexibility in terms of how you go to market.

The main point remains very consistent for me: 

4. Options - You Have Options. There are more ways than you realize how to go to market. Price discrimination is a way to create different price points for the consumer.

[Y]ou have many options and flexibility in terms of how you go to market.

Explore them.

You can read further highlights from our conversation here.

You can download a free copy of his book here.

Comments

[Brandon]

Zane,

Interesting perspective on pricing.

In my role as a practice administrator for a “private” medical practice, I’m always looking for ways to incorporate traditional business principles into the confines of the health care field.

One of the major challenges we have as private medical providers is that we don’t have control over price (assuming a practice takes insurance payments and is not under a cash only business model), thus limiting our ability to give customers (or in our case, patients) options.

Margins are also compromised because cost tend to increase for medical practices (rent, salaries, vaccines, medical equipment, IT upgrades, malpractice, health insurance for employees, etc) yet we are unable to pass those cost increases to our customers.

As small business owner, imagine running a business where a third party decides what one is able to collect for services without taking into consideration how much it cost to provide those services. Oh, and the third party has the ability to not pay at all if they decide it is not deemed necessary.

Fundamentally, we are in a hairy predicament. On one hand, we have to achieve revenue growth as well as keep positive cash flow (otherwise, we can’t keep the lights on or pay our employees to treat our patients), just like any other business. But on the other hand, the system doesn’t afford us options or flexibility that Mr. Sattersten suggest.

I’d love to hear your thoughts.

Brandon – aka @PediatricInc

[Me]

Brandon,

Great comment. Thanks.

This is my 2nd effort at a comment. Maybe this 2nd effort will result in a clearer comment. Maybe.

Control Over Price. That’s a big issue that you do not have control over price. Then again, it’s an illusion that companies set prices. Yes, they can decide the price they publish on a website or order form. But ultimately the price is set with what happens before and after that step. Before are all the decisions a company makes about what values it offers in its products. If I’m reading you right and writing in what may read like cavalier tone, you describe this decision as the decision to accept insurance payments and forego a cash-only business model. Convenience of payment for your patients was more valuable than the alternative.
Passing costs on to consumers. I understand you unable to pass on cost increases to our customers. On the other hand, I read regularly of the rising costs of healthcare? There’s a gap between these two. What am I missing? What are patients missing if they read you cannot pass on the rising costs for delivering healthcare but we see rising costs of healthcare in general and sometimes in particular with our needs.
Third-Party Decision-Makers. This is where the conversation gets even more interesting. These 3rd-party decision-makers I believe are the health insurance companies. They are exempt from anti-trust provisions. Their bureaucrats, er administrators, control not only the payments you receive but what treatments will receive payments. They in effect control our healthcare system.
Med School Education. I’m not smart enough to be a doctor. I haven’t stayed in a Holiday Inn Express, either. But one story I hear constantly is the story that med schools do not prepare their students to run businesses. Med students are some of the smartest, strongest, stamina-rich folks in the world. On the other hand, their classes mostly avoid the topics you discuss here: profits and cash-flows, prices and costs, 3rd-party payment administrators....
Business Model Conflict. Again, I’m not smart enough to be a doctor, but the allure for enduring the costs and trials of a med school education is money and mission. There’s a lot of money to be made in the mission to save lives. There’s even more money made by those who control the flow of money within the healthcare system. That last group is on the far end, the money end, of this motivation spectrum. And you, with your doctors are on the other end.

Moving between those two ends are the patients, the consumers.

There’s the rub. This dynamic, this system, will take even more of our wallets, individually and collectively in the coming years while at the same time putting more pressure on you and your colleagues to make a profit, keep cash-flows positive in order to keep the lights on, pay the employees, etc.

Moving to a cash-only practice sounds great for being able to set prices, control your cash, cut costs, simplify, etc. On the other hand, we’ve become addicted to that other situation.

And all the time there’s a lot of money, power and people at play.

I wish I had a solution. Maybe Mr. Sattersten?

[Todd Sattersten]

Brandon,

You are not the first person who has asked about my ebook as it relates to healthcare.

I think you are in the tough spot with your "pricing" and revenues heavily controlled by another party.

Let me give you three ideas:

1. People only go to the doctor when something is wrong. Build a separate practice based around wellness with completely different goals for both your customers and your business. Move it outside of the insurance model.

2. Offer a premium service. More time with the doctor. Follow-up with a nurse visit. Adding a simple question of "How much time do you need with the doctor?" could create add another price point.

There is also an opportunity to create a membership that collects money over the entire year to have access to the service.

You will need to experiment with pricing to see what the market will bear. I think you will surprised.

If more time was one variable, you could have a couple of those slots built into the schedule and if they aren't "sold" offering them as a bonus to important patients or samples of the premium service to new clients.

These could all be fret with perception problems. I understand that. From the outside, I can tell you with certainty the healthcare industry is underserving its customers and many would be willing to pay more for a better quality of service.