For mental health practitioners, especially those working with cash therapy clients, setting the correct price for your sessions is often an exercise in hope mixed with a little optimism combined with a little more anxiety. In fact, choosing pricing for any product or service can be a challenge! This article ought to help demystify the process or at least provide you with some action items that can help you set optimal prices that maximize your private practice profit.
Why price optimization matters for all private practice therapists
You are probably one of three types of therapist.
- New to private practice
- Experienced and struggling
- Experienced and profitable
Even profitable therapists should consider analyzing pricing
While logically pricing concerns are often common with the first two, even an experienced and profitable behavioral health practitioner should think about price optimization. For example, as a profitable therapist are you working more hours than you’d like? Is your schedule jam-packed leaving little time for professional development or even more critically, time to adequately provide your full attention on each client?
New or struggling therapists often focus on the wrong things
The number one question I get at iCouch from practitioners: How can I get more clients? While marketing is critical (in fact, we frequently write about therapy practice marketing,) pricing is equally as important. Many practitioners, especially new or struggling ones, focus on the wrong priorities. For them, a successful practice is built on a great marketing plan. They’ll spend countless hours building a great website, printing fliers, wandering around town trying to make connections and posting hopeful profiles on various therapist directories.
That’s all important however, ultimately the success or failure of your therapy practice depends on charging the right amount of money for your services.
It sounds simple right? However, you’d be surprised how more thought goes into your business card design than does your private practice economics!
Therapy Economics 101
First off, let’s dispense with the idea that a therapy session is some sort of exalted product, free from the vulgar constraints of supply and demand. It’s a product (or more accurately a service,) just like any other. Neurosurgeons provide a service, plumbers provide a service, birthday clowns provide a service. An astute reader might notice that list is in order of relative importance. If you have a brain tumor, you’d be willing to pay almost anything for the neurosurgeon. A birthday clown? If it’s cheap enough, you might consider it, but you’re certainly not going to mortgage your house to pay for one. You’d probably barely even consider using a credit card!
In economics terms, the demand for a neurosurgeon is relatively inelastic, while the demand for a clown is very elastic. In other words, as the price goes up or down, demand for neurosurgeons remains fairly constant, while demand for a clown is extremely price sensitive.
Elasticity is the measure of the price-sensitivity for a product or service.
While some of us might consider mental health treatment at the same level of importance as a neurosurgeon, in fact, mental health therapy is even more elastic than a plumber! I’m not making a statement about the importance of either, I’m just stating facts. If your toilet explodes, you’re definitely calling a plumber, in fact, you’re calling him (or her) right that instant. If you’re having a panic attack, you’re rarely going to race to the therapist’s office or fire up an online therapy session.
In other words, if a person has $100 to spend and has a broken toilet or a broken heart, that $100 will almost always go to the plumber first. Economics is the study of scarcity and, given the finite amount of money in one’s pocket, the use of that money will be determined by the relative importance of the goods or services that money can buy.
According to the Rand Health Insurance Experiment, outpatient psychotherapy treatment is three times more elastic than for other medical visits.
What does price elasticity mean for therapists?
It’s pretty simple. It means that if you raise your rates, you lose clients. If you lower your rates you get clients. Seems like common sense right? However, as with everything, devil is in the details, the million dollar question is how many clients will you lose or gain for any change in price?
Price Elasticity of Demand Formula
The η represents the price elasticity of demand. The Q0 represents the initial quantity demanded when the price equals P0. The symbol Q1 represents the new quantity demanded when the price changes to P1.
The price elasticity of demand will always be negative because of the inverse relationship between price and quantity demanded. As price goes up, quantity demanded goes down, or vice versa.
So given we know the elasticity (η equals -0.6) for psychotherapy (it’s -0.2 for other medical care.) Of course this elasticity will certainly vary, but it’s a very good baseline figure. You can certainly calculate your own if you measure your demand at one price, then change the price and measure the resulting demand. But, for now, let’s use the values we have.
Now lets run through a scenario, using the formula above:
Let’s say that you’re a therapist doing 15 sessions per week at $85 per session.
Our Q0 is 15, our P0 is $85.
We want to see what the effect of lowering the price $15 will have on the number of sessions we have per week.
Our Q1 is unknown, our P1 is $70.
Plugging that into the formula gives us a Q1 of 56.534
That means that lowering your price from $85 to $70 means you’ll do about 56 sessions instead of 15.
Conversely, if we raise our price to $100, you’ll do about 13 sessions instead of 15.
Obviously our η value might not be accurate given your location, specialization or other variables, but as a general baseline, it’s not a bad place to start.
Factors that influence the therapist’s optimal price
Now we have a good idea of the effects of lowering or raising prices on the number of sessions you do, the next part of this exercise is to determine your costs. That then gives us enough information to determine your ideal session rate.
Common Private Therapy Practice Costs
- iCouch subscription (sorry, couldn’t resist!)
- Phone Service/Utilities
- Marketing Expenses (i.e. advertisements, printed materials)
- Professional Memberships
- Continuing Education
I’m just going to make up a number for the purposes of illustration. Let’s say all of those expenses total $3000 per month. The specific number doesn’t matter — it’s different for everyone.
The costs listed above are fixed costs which means that they’re roughly the same regardless of the number of clients you see. Generally you have to pay office rent if you have 1 client or 50. Obviously there could be some costs that vary depending on your client load, if that’s your situation, you can adjust things as necessary.
What happens when you raise your therapy session prices?
If you have 100 sessions per month at $85 per session, that means you’re bringing in $8500 per month. Since you have $3000 in expenses, that means you have a gross salary of $5500 per month. (Obviously, I’m simplifying the calculations for the purposes of illustration!) That’s $66,000 per year (assuming no vacations, etc.)
If you raise your price to $100 per session, based on our Price Elasticity of Demand formula, you’ll now do 90 sessions per month. However, you’ll actually increase your monthly income to $9000 per month. That’s a $6000 raise you have given yourself as well as a reduced workload!
If you raised your rate to $150, you’ll be doing 72 sessions monthly and bringing in $10,800. Less work, more money.
If you went to $300 per session, you’d be doing 49 sessions per month and bringing in $14,700 per month or $140,000 per year.
However, while I’m not an economist, I suspect that as you get to the extremes of the formula, the results are less accurate. So don’t set your rates to $300 just yet! Also, as I said, that elasticity number is just a baseline determined by researchers and doesn’t necessarily represent yourspecific market. However, the point is that there is a way to calculate optimal prices based on demand and costs.
It’s also important to note that you have to have clients in the first place! Meaning, if you’re starting from zero, just setting a price doesn’t mean clients start walking through the door. You still have to take therapy practice marketing seriously. However, if you’re marketing machine is working, that means that you’ll get clients willing to pay higher prices and you can afford to lose clients who aren’t willing to pay higher prices.
The Morality of Mental Health Pricing
There is likely a good argument to be made that high prices reduces access to mental health care. However, there’s also another argument that could be made that you are a business, not a charity. If you charge “high” prices, that means you’re conducting fewer sessions generally. With that extra time, you could potentially volunteer one day per week to provide services for the underserved. With fewer clients necessary to keep your business healthy, you have more time to give back in appropriate ways.
A starving, overworked therapist is no good for anyone! Remember, take care of your business (and yourself) first, then you’ll have the resources to increase your altruism.