Recently the Office of Fair Trading confirmed the way some prices are presented tempt consumers into error, that is, they are not crystal clear. An example is ‘drip pricing’ where people who want to buy economy airline tickets obtain a low starting price but end up paying a very different one at the end. In supermarkets one regularly sees complex pricing in the form of three-for-two offers where one has to calculate the unit price. Another is ‘baiting’ where customers are offered a cheap but time restricted deal, on products they may not immediately want.
Research showed that consumers were worse off in this order of purchasing:
- drip pricing
- time-limited offers, with baiting
- complex pricing
The amazing thing is that although consumers clearly were losing out there were not corresponding gains for the retailers as the sales volumes were almost the same no matter which way the prices were presented. The main effect was on distribution of sales as the first shop visited, sold most goods because consumers grabbed the ‘deals’.
In 2007 Radiohead, a British rock group, released an album, In rainbows as a direct digital download. This caused major consternation as the band allowed listeners to pay whatever they wished. It represented a blow to the traditional music industry business model. Whilst around 60 per cent of the downloaders paid nothing at all, the band still earned nearly $3m / £2m from the experiment.
Another pricing experiment was initiated at the exit of a roller-coaster ride at a large amusement park. Riders were offered a photograph of themselves, taken midway. The usual price was $12.95 /£8, but on one day riders were told they could pay what they wished, including taking the photo for free. A second group was charged the full price but told that half the money would go to a well-regarded health charity. Yet a third group could set the price and see half of their chosen amount donated. Allowing customers to set the price dramatically increased the percentage of buyers – from less than one to eight per cent. Even accounting for those who took a free photo, the amusement park collected more revenue on the pay-what-you-want day than when selling for the usual fixed price.
The authors also found that of the customers who were allowed to pay what they want, those who were told that half the money would go to a good cause paid substantially more than those who were not told about the charitable donation - to the point that revenue more than tripled. (The charity did, indeed, get its promised cut.) The smallest number of purchases, meanwhile, came the day that customers had to pay the full $12.95/£8 but half was donated.
This is more than simple altruism. It’s believed that paying what you want signals something about who you are. Every dollar you spend is a direct reflection of how much you care about this charity and what kind of person you are. No one wants to go cheap with a charity.
This phenomenon is called ‘shared social responsibility’: instead of passively accepting a company’s assertion of its charitable donations, the customer must actively agree to give money to charity, and determine how much. Now wouldn’t it be a great new event for UK dentistry to have a day set aside with patients being told they could price their own treatment? In public relations terms I’m sure it’ll pay for itself and if the experiments materialised into experience, imagine the extra charitable monies rolling in.
The one problem is that it’s noted that customer-determined pricing works best for products with low marginal costs. So I guess this might not kick off in 2012 Smile Month!
As a profession, we are uncomfortable in both setting private prices and discussing them. It has a lot to do with our training. We were never taught the commercial reality that will affect eight or nine newly qualified dentists who go into practice.
It’s a shortcoming that doesn’t get addressed fully in vocational training because it is primarily NHS based and the prices are fixed by Government.
It never fails to surprised outsiders who assess dental practices, such as capitation companies and other business management consultants, on how prices are guesstimated rather than realistically constructed to reflect operating costs and the profit to be realised. In some ways the differences in prices between dentists was of benefit to us when the Office of Fair Trading investigated dentistry as a monopoly, in the first-ever super complaint.
They found no evidence of the profession behaving like a monopoly because of the substantial difference between private prices.
I suspect it’s the unfamiliarity of the price setting exercise and not laziness that prevents dentists from setting their prices correctly. Simply taking last year’s accounts adding on the increase in salaries, the investment in the practice and the desired profit level would give a turnover figure to be achieved for next year’s target. If you divide that figure by the total number of working hours a week multiplied by the number of weeks in the year you wish to work you have your hourly target. This cannot take more than a few minutes to do and yet most of us are probably very guilty of not doing so.
Whilst many people can probably get by without this very simple managerial control of fees, it does threaten the viability of practice in these fast changing times. Without doubt we are witnessing UK Governments demanding more from practices whilst paying almost the same amount every year. Next year we might even have four per cent ‘efficiency savings’ imposed thereby dropping turnover, year on year.
That’s putting pressure on practices, which shifts the pressure on to the associates and staff. No wonder the BDA survey in November 2010 showed low morale amongst the UK dental workforce. Unfortunately going private and guessing the fee to charge patients is not a guaranteed (or professional) way to success.
Even 10 years ago, using the word profit in a professional setting environment raised eyebrows. I don’t believe it’s that common nowadays. Yet if you ask your bank manager if they would support a business that was focussed on profit rather than meandering its way along there, the answer would be an unequivocal ‘yes’. That’s important in today’s economic times where lending is stifled.
Probably the most impressive change scene in general practice in the past decade is the rise of consultants and coaches. I have lectured with two of these experts, who were not dentists, and yet their understanding of dentistry is a business and the people who work in it were outstanding.
Naturally these people are successful and respected. I suspect there are many more like them. People who can recognise the problems in practice, propose ways of dealing with them, support you for doing so and then celebrate success are very welcoming to our profession.
Whoever you rely upon, it is important you understand how to price your services so you can provide a professional service and make a reasonable and fair profit.