THINKING BUSINESS
a blog by Chris Barrow

Protect your profit margin

Inevitably I get a lot of questions about pricing, usually in connection with:

  1. what should I charge my patient?

  2. what should I pay my associate?

  3. should I offer 0% finance?

  4. what discount should I offer for those who join my plan?

Without exception, the conversation begins at the wrong end – with the price.

Dare I suggest that in most cases, the dentist’s solution to setting prices is:

  1. I’ll ask around a few mates

  2. I’ll take a look at what the practice down the road is charging

The top-down approach to pricing is a minefield.

I recently analysed the price of a Cerec crown with a client:

Price charged to patient £500.

“Lab bill” (i.e. the cost of milling) £135

Payment to associate (500-135) x 50% = £182.50

Operating cost per surgery per day = £250/7 hours = £35.71 (assume 1 hour for the appointment)

Pre-tax profit (500 – 135 – 182.50 – 35.71) = £146.79

Profit margin (146.79/500) = 29.35%

That sounds like good business. It IS good business.

The crucial figure here is actually operating cost per surgery per day (OCPSPD).

That is calculated by looking at the fixed costs of running the business (overheads) and dividing by the number of surgery days available in the year.

Keeping your OCPSPD low is mission critical and yet most Principals don’t even know what their number is.

If you start building the shag-pile and chandelier practice, this can increase very rapidly.

In the above calculation I was dealing with a mainly NHS practice who are slowly developing their private sales.

The OCPSPD at £250 is comparatively low.

If this creeps up – the numbers change – lets look at a practice where the OCPSPD is £450 (or £64.28 per hour).

Pre-tax profit (500 – 135 – 182.50 – 64.28) = £118.22

Profit margin (118.22/500) = 23.64%

That’s an “ouch” but not the end of the world.

Now we get to the really damaging bit.

Option 1 – the patient joins the membership plan and so you offer a 20% discount on the crown.

Option 2 – the patient is offered 0% finance with a 7% internal finance charge.

Even on the £250 per day OCPSPD the difference is dramatic:

Price to patient £400

“Lab bill” (i.e. the cost of milling) £135

Payment to associate (400-135) x 50% = £132.50

Finance charge @ 7% £28.00

Operating cost per surgery per day = £250/7 hours = £35.71 (assume 1 hour for the appointment)

Pre-tax profit (400 – 135 – 132.50 – 28.00 – 35.71) = £68.79

Profit margin (68.79/500) (note here I am using the original price of £500) = 13.75%

You cannot sustain an independent practice doing work for a 13.75% profit.

If your OCPSPD is £450

Pre-tax profit (400 – 135 – 132.50 – 28 – 64.28) = £40.22

Profit margin (40.22/500) = 8.0%

You may as well sell your practice and build a buy to let portfolio – it’s a better return and no GDC.

To summarise – if you:

  1. invest in the practice so that your OCPSPD goes up

  2. pay your associates 50%

  3. offer membership discounts and

  4. offer 0% finance

You can quickly ruin your business.

So that’s the problem.

Tomorrow I’ll talk about the solution.

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