MARKET SKIMMING

Skim pricing occurs when a business prices goods or services so high that only a few consumers can afford them. In the automotive world, Porsche and Bentley automobiles are sold on this basis. Dental practices that profit significantly from a few patients by charging high fees employ skim pricing.

A paradoxical value of high fees is that consumers may use them as an indicator of quality. A patient who perceives the quality of dental care as high is not as concerned about the cost of that care. Treatments for these patients are based on non‐fee considerations, such as esthetics, image, treatment outcome, or personal interaction with the dentist and office staff. Often then, high fees may lead to higher patient satisfaction.

Market skimming also has limitations for use in a dental practice. The number of patients who will buy dental services without regard to the price is not large. So only a few practices in an area can use this skim pricing. Each of those practices must offer something unique for which the patient is willing to pay a premium price. Practitioners must be sure to differentiate themselves from other dentists in the area. In that way, a patient dissatisfied with the fee will be less likely to leave because they have no (or few) other substitutes or comparable providers. Patients with dental insurance may question a procedure fee when their insurance carrier notifies them that the charged fee exceeds the carrier’s usual, customary, and reasonable (UCR) fee schedule. When other practices in the area discover these higher fees, they may provide similar services, market the service similarly, and charge fees similar to the practice that initially adopted a market skimming strategy.

SATISFYING

Many dental practices may not emphasize extreme profitability in the short or long run. These practitioners may exhibit behavior that produces satisfactory, rather than maximum, profit. Satisfying behavior is an economic notion that emphasizes attaining the desired level of something without maximizing anything. Ford Motor Company “satisfies” in its mid‐sized line of automobiles. It produces adequate numbers of automobiles, charges a reasonable price, pays its workers a satisfactory wage, and earns a satisfactory profit. It could maximize profits in the short run by charging more, but might lose satisfied customers or workers. A dental practice that uses the satisfying strategy structures its fees so that everyone is “fairly happy.” The practice meets current expenses and allows the dentist to live comfortably and to reward the staff adequately (comfortable and adequate have different meanings for different people).

Creating this perception of satisfying behavior helps the practitioner to earn a reputation for being fair and equitable. Studies on dental consumer satisfaction suggest that the attributes of professionalism, quality, and reputation are significant determinants of consumer selection and retention of a dentist. Patients who perceive their dentist is satisfying rather than maximizing may assume a higher level of satisfaction in the dentist–patient relationship. The cost of care alone does not lead to satisfaction but can significantly exacerbate patient dissatisfaction. (Patients will not become more satisfied if they believe the fee is fair but will become dissatisfied if they believe the fee is too high.) Therefore, a satisfying fee strategy is a practical component in developing patient satisfaction.

MARKET PENETRATION

Fees may be set at a low level to attract new customers or “penetrate” a new market. Many stores have grand opening sales to develop markets for new outlets. Ford Motor Company also uses this strategy in pricing its entry‐level line of automobiles. The hope is that the low price will lure initial Ford buyers who will later upgrade to larger, more expensive (and more profitable) automobiles in the line. In dentistry, the price or fee may be set below that of similar services offered by other dental practices to attract potential patients based on lower fees and, hopefully, keep them in the practice. It is often used for services such as initial exams, cleanings, economy dentures, or even orthodontics.

Many high‐volume retail dental operations use this pricing objective. They aim to attract patients based on a lower price for a common service, such as an initial exam. By doing this, they hope to attract enough patients to penetrate the market. Once they establish a patient load, the retailer may adjust fees upward to approximate those of other dentists in the area.

Advertising dentists who offer initial price reductions in their advertisements or coupons use a similar strategy. A free or reduced‐price examination, prophylaxis, or radiograph attempts to penetrate a market and generate new patients for the practice. This strategy is especially effective for cost‐conscious dental consumers. It is much less effective for consumers for whom cost is not a significant deciding factor. These groups include families with higher discretionary income and managed care participants.

Managed care dental plans often use a similar strategy to become established in the dental benefits market. Their goal is to price the managed care plan at a low entry‐level price compared with conventional dental reimbursement plans. By doing this, the dental plans hope to rapidly attract companies or organizations as clients and build a market share. Once they build this share, they may eliminate the introductory offer, and prices may rise. Profitability to the participating dentist under this objective is small or may not exist during the plan’s growth phase.

Using a low‐price market penetration strategy is only advisable under certain circumstances. The markets in which this strategy is most effectively used include markets highly sensitive to fee levels (demand for a service increases as the fee declines), in which a lower fee would discourage competition, and those in which a lower fee does not equate with poor quality. Whether the traditional dental practice marketplace meets any of these criteria is debatable. Many patients may use price as an indicator of quality, particularly for intangible services like healthcare. Dentists must also inform potential patients of the price, which means that they may incur expensive advertising costs to inform the potential patients. However, advertisements rank low as an important dental consumer decision factor. Therefore, undue emphasis on advertising dental services may be counterproductive to the effective marketing of dental services. A market penetration strategy may be used by independent practice associations (IPAs), preferred provider organizations (PPOs), or other groups competing based on price and willing to accept low profits to build a presence in a particular market.

COST‐BASED METHOD