On a manned space flight to Mars, which is 34 million miles away, 50% of the fuel would be used to go the first 400 miles. The reason for that, of course, is what’s involved in escaping Earth’s gravity. In many ways this is similar to starting and operating a dental practice.
The gravity is your list of fixed expenses–rent, equipment leases, loan payments, utilities, salaries, etc. Until you “escape gravity”, that is, produce enough to pay your fixed expenses, your practice profit for the month is $0. After that, you are able to keep an exceptional amount of the collections for that month, because for the most part your variable expenses–lab costs and supplies–is less than 20% of your fees.
This is very different from many other businesses. In most retail stores, for example, the fixed expenses are less than 20% and the variable costs, like the stuff they put on the shelves, is close to 70%. If they sell a lot more in a month, they still only keep 10-20% of what goes in the till.
The challenge for most dentists is that they are barely escaping gravity. The team works hard at “cracking the nut” every month, and the accountant tells the dentist that her overhead (calculated by all costs except the what the dentist pays him or herself) is 70%. So the dentist thinks that for every dollar she produces going forward she is only going to keep 30%. That could not be further from the truth.
Once you escape gravity, you keep 80% of the increase in production. This economic fact is one of the most beautiful things about the dental practice model. For example, say a practice is producing $40,000 per month, (which in the average urban area is still trapped in fixed-expense gravity) and the profit margin is 30%. That’s $12,000 to the dentist. Now imagine production is increased by $8,000 in the following month. Then the economics change significantly.
How? Simple. Because on that additional $8,000, the only expenses are variable ones: lab costs, consumables, and perhaps a bit of employee time. Even a high estimate of that would come out to only 20% in the average practice. Which means $6,400 is additional profit. You’ve gone from making $12,000 to $18,400. You’ve increased production by 20%, but in fact your profit margin has now gone from 30% to 38%. And your take-home income has increased by more than 50%!
This is why the more successful practices can do more marketing, bonus their teams more, add new equipment and technology and upgrade their facility, further improving the efficiency, appeal and success of the practice. It is not unusual for a dental practice producing over $800,000 to operate at less than 60% overhead.
I’m writing about this because I often encounter dentists who are thinking about advertising to get new patients (or using 1-800-DENTIST) and they make a calculation on the return on investment based on their perception of their overhead percentage. But the production on those new patients is at your “escaped gravity” percentage, which means you can afford to invest in your growth at a much higher level. You may pay $200 or $300 for a new patient, but if the lifetime value of a patient is $4000, (it’s much more than that, by the way–watch this video if you don’t believe me), and your true profit is 80%, you’ve invested $300 to make $3200.
Do you think group practices understand this formula? You can bet they do. And if you want to compete effectively with them, you’d better understand it too.
Isn’t this unique economic opportunity good motivation for getting better at what you do, and increasing your production? Does it not make sense to incentivize your team to get the practice to escape gravity every month, and every year? By the way, this is also where your economic freedom will come from. It’s a lot easier to save 10% of your income when your profit margin is 40%.
There are thousands of practices that do this every month, and they don’t have some magic bullet marketing trick. Okay, they do, but it’s not some secret Google AdWords formula or miraculous direct mail offer. It’s this: consistently creating a great patient experience. And that may not be easy, but it’s doable. And when the rewards are this stratospheric (you know I had to complete the metaphor somehow!) then it’s worth the focus.
So get a coach for you and your team. Or buy a copy of my book for every team member, and have weekly sessions on how you can improve your practice experience. In other words, do something different if you want different results. And blast off!
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Nicely explained for dentists! Thanks, Fred, for another keeper!
Fred, this is so on point! It’s amazingly simple how it is to get and keep quality new patients, and it all starts with an exceptional experience in the dental practice. It’s not rocket science!!! It is consistently take our patients “To Infinity and Beyond!”
It’s not rocket science–why didn’t I think of that?!?!? Thanks, Lisa!
Thanks Fred! There’s so much to understand in the financials of a practice and no doubt that it all depends on one to succeed. Happy holidays to you and greetings from Guatemala!
Fred, thanks for presenting the numbers in a very logical explanation.
So many doctors have difficulty with understanding fixed costs, and variables. And then understanding that the profits are made in the increase in production and collections.
Locking in loyal patients with a World Class Experience at the dentist creates Raving Fans who return more often, refer more and accept treatment more readily.
Knowing THIS is indeed truly ROCKET FUEL for your Dental Office.
Having MORE productive Dentists working in your Office is the “secret sauce” to financial nirvana!
Well written, Fred, and absolutely true! Thanks for sharing! 🙂
Spot on, Fred! Marketing can accelerate a practice way beyond the initial dollars spent – if the team effectively cares for patients with an exceptional effort – you’ve said it best – we are not creating new patients, we are creating new “friends!” Blast off!
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