Negotiating Profitable Vendor Contracts at Your Veterinary Hospital
When it comes to vendor contract negotiations, the wide variety of available options can make the process difficult for veterinary hospital owners to navigate. Vendors offer many incentives, including upfront cash, pricing discounts, and points that can be utilized to purchase supplies or equipment, to name just a few. So, how do you decide which option is best for your veterinary hospital?
When evaluating these contracts, it’s important to assess the total impact on the hospital. For example, even though the upfront cash may seem like a great option to increase working capital, these types of contracts often come with increased pricing during the life of the contract. The increase to cost of goods sold in future years can actually result in a decline in the bottom line and overall value of the business. To determine whether this type of contract is advantageous, hospital owners should compare the upfront cash offer against the impact of the increased pricing of the product. Let’s say a vendor offers a $5,000 upfront payment. A hospital owner should multiply the increased pricing of the product by the quantity to be purchased over the term of the agreement. They should then compare that amount to the $5,000 to determine the better option.
The best option may be requesting the lowest pricing available. The lowest price will likely have the largest impact on the hospital’s profitability and overall value. The savings can also be passed along to pet owners as reduced fees.
To demonstrate how reduced pricing can benefit the hospital, let’s consider an example. If a hospital is able to save 0.5% on the pricing of certain services, this 0.5% cost reduction will reduce the cost of goods sold and increase the business’s earnings before interest, taxes, depreciation, and amortization (EBITDA). For a hospital that generates $2 million of revenue annually, this 0.5% in cost savings can increase the bottom line by $10,000 each year. The higher bottom line can – and should – increase the value of the hospital.
If you need help ensuring that you are signing a vendor contract agreement that will best benefit your hospital, please contact KSM’s veterinary consulting team.
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