Pricing strategies for cash-based services

Physicians frustrated with the administrative burdens, rushed visits and other constraints of traditional private practice increasingly are seeking to transition to “concierge” or cash-based services.

A challenge that direct-pay providers face is that cash-based businesses have much greater pressure to embrace the marketing paradigm and associated brand management. Physicians can be resistant to marketing concepts for multiple reasons. Marketing and advertising often are confused with one another. Marketing has a much broader context and is a critical component of the business plan. Medical board regulations in some states cause angst as they can even pose sanctions on certain promotional activities such as testimonials.

In a third-party payer environment, a practice can function with a logo and decent wait times and patient satisfaction scores. That may not be the case in a cash business, where a unique value proposition is needed with a clearly identified target market and the inclusion of the clinical environment as part of the brand. The absence of these elements can lead to price sensitivity among prospective patients.

The challenge to establishing value and pricing of these services can be demystified by following traditional marketing principles. Consider your strategies in the traditional marketing mix with the five Ps:

Product (service). Cash-based services might include:

• Convenient care services, including telehealth, or drop-in urgent care services with easy access but limited scope
• Membership medicine, direct primary care or other retainer-based care framework
• Physician advocates and navigators
• Services integrated with alternative health options
• Prestige specialty services

Overall, cash-based services tend to offer a higher level of patient-centered care. Expanded diagnostic testing and personalized care are also considered, as are high-level care coordination, preventive services, extended visit times and private waiting areas. Understanding the unmet needs of prospective patients is critical in articulating service options.

People. Beyond traditional demographic analysis, consider resources such as tapestry segmentation and Esri’s U.S. consumer spending database, which provide in-depth analysis of consumer spending behaviors in the communities that you identify. Such resources may be available at your public library at little or no cost. This data will help you understand how the population is spending its discretionary money. Contemporary marketing strategy goes beyond focusing on a target market segment and drills down to a “best customer” as an avatar, to understand an individual’s attitudes, preferences and dislikes as a prospective patient. An undefined target audience does not allow for the promotional message to be clear enough for effective consumer decision-making.

Promotion. Your promotion strategy will coincide with your pricing. Prestige services are better-suited to a slick, four-color insert than social media. PrevMed heart attack and stroke prevention, for example, offers tiered services, including advanced lab diagnostics and genetic testing. Its promotional strategy includes continuing education to dentists and personal diagnostic services. Considering that periodontal disease is also a risk factor for heart disease, dentists also become a referral source.

Place. Location will drive demand and patients’ ability to pay based on economic demographics, as does the cost of rent. It is becoming abundantly clear in the marketplace that customer environment is part of the brand. In contrast to a crowded and chaotic waiting area, one might experience dim lighting, a beautiful aquarium and tasteful artwork without the crowd. Create an environment to match your unique value proposition and impact customer loyalty.

Price. Pricing strategy must consider the perceived added value to the prospective patient, competitors' prices and the practice’s cost of care delivery.

Select the price objective

Determine the practice’s position in the market. Some will want to maximize market penetration with low-cost services, and others may wish to dominate the market. Others will want to serve the community with standard offerings, while some will serve a higher-income population with prestige services. Having the lowest price in the market can increase market penetration but also can fail if quality is congruently perceived to be too low.

Source: Kotler, P T., A Framework for Marketing Management, 2nd Ed. © 2003. Reprinted by permission of Pearson Education, Inc., New York, New York.

Establish a price-service quality strategy

Determine the overall practice strategy for price-service quality (see Figure 1). Lower service quality doesn’t imply poor clinical quality but could be related to a more restricted scope of services, where higher quality might equate to longer visits and a more luxurious environment.

Most marketing experts will recommend that practices offer choices or tiered services rather than upselling. Consider a variety of levels of service at increased price points.

Consider fixed and variable fees for optional services

Some patients may be able to pay more for a wider variety of services in a retainer-based setting. If a segment of your population would prefer a lower-cost option, the practice can also offer the lower price tier with optional services available for additional fees.

Estimate the demand for your services

Consider what distinguishes your brand and the services that you offer. Where can people get those services elsewhere? How frustrated are the consumers in your market and how easy is it to convert them to your delivery model? Supply and demand will factor into your anticipated volume and into the price equation.

Estimate your costs and pricing methodology

Unless you have a hobby practice, the cost to deliver services is the most critical driver of pricing. This step may require the assistance of your accountant or other finance expert. A break-even analysis will help identify a price based on target return, particularly to determine the return on investment of a business loan or capital investment. A markup price would determine the cost assuming physician salaries were included in the cost, and margin for bonuses and future capital outlay. Of course, volume estimates would be integral to these calculations.

It is critical to assess state laws when promoting a concierge practice. Physicians can be sanctioned by the actions of their marketing and public relations firms, so it is important to be aware of regulations such as not using testimonials or overpromising benefits.

Conduct a comprehensive competitive analysis

It is critical to understand the competition’s pricing, as well as their value proposition and marketing mix. Simply following the pricing of competitors is risky because their capital, real estate and professional services costs may vary significantly, putting the concierge seeker in a vulnerable situation.

Use an effective price point strategy

Prices for economy and medium-based services typically end in “5” and “9,” such as $9.95 or $299. Customers better perceive prestige services with prices ending in whole numbers, such as $500. Also consider the perception of promoting a monthly fee of $120 rather than an annual fee of $1,440. These strategies are not intended to manipulate people, but rather help align consumer perception with the price-service quality of your services.

Guard against price discrimination

A movie theater may offer senior and student discounts, but a practice offering services at multiple price points could result in legal action for discrimination. Be cautious of multiple prices for different groups.

Establish a price increase strategy

Patients may tolerate annual price increases in a retainer-based environment. There may be greater price sensitivity for individual services. However, practice costs do increase over time, making a price increase plan important. Price changes among competitors also should be monitored.

Evaluate patient attrition

An exit survey can help the practice understand if people are leaving because of price sensitivity, or if the practice has failed to fulfill its value proposition.

Putting it all together

Many describe pricing as an art. It is the dance between internal costs, the competition, perceived value and the practice’s brand.

A muddy brand will establish the practice as an average player in the market and likely lead to greater price sensitivity. A clearly articulated target audience, identified unmet needs of that audience and a unique value proposition will result in a tighter brand and provide more flexibility in the price structure. Helping physician owners understand the need to explore broader marketing strategies is a key to success.