Protect your Profit Margin – the solutions
Yesterday we looked at how easy it is to erode your profit margin by careless pricing, discounting, finance and special offers.
So how do you “protect your profit”?
Frequently the answer I hear is “pay my associate less”.
It is for that reason that associate remuneration in NHS dentistry has been heading downhill for 10 years and many are on the equivalent of a 35% contract (albeit hidden in UDA values South of the Border).
The same pressure is bearing down on associates in private practice.
I’ve been one of the leading commentators on this subject (for over 10 years now), arguing that after FD1 & 2, apprentice dentists should be paid a fixed salary and then moved onto a sliding scale contract (if they make the grade) of between 35% and 55% depending on gross. I have three clients recruiting on this basis now and they are not having any trouble filling places.
However, associate-bashing (or “restoring their differentials” as Arthur Scargill might have said) is a blunt instrument that in the absence of other prudent measures can cause a lack of goodwill and low morale, as well as some untimely exits – tread with caution. It is simply easier to recruit new associates at the right rate than reduce perceived earnings potential for existing team members.
There is a more comprehensive answer to the problem of careless pricing.
By pricing from the bottom line upwards.
You begin the internal conversation by asking:
what is the minimum level of profitability that I am prepared to accept on this procedure?
If we return to yesterday’s Cerec crown , you will recall that, with a 50% associate contract in place, the original profit on the procedure was calculated as follows:
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%
But we also saw yesterday that the addition of a membership plan discount, 0% finance and a higher operating cost per surgery per day could quickly reduce your profit well below minimum viable levels.
So as the owner of the business you could establish a golden rule – that you always want to make £146.79 profit on any Cerec delivered by an associate, under any circumstances.
So, assuming the lower OCPSPD, let’s bring back in the membership plan discount and 0% finance. Then reverse the calculation as follows:
Target profit = £146.79
OCPSPD (one hour appointment) = £35.71
Total gross profit required (146.79 + 35.71) = £182.50
Lab bill = £135.00
Total so far = £317.50
Payment to associate (bear with me on this for a minute) = £182.50 (as before)
Total nominal price to patient (before associate calculation) (146.79 + 35.71 + 135.00 + 182.50) = £500.00
Back to square one – but where are we going to fit the membership plan discount and the finance charge?
This is where we come to a bit of vintage Coach Barrow.
Somebody has to pay – the choice is simply yours:
You and Your Family
Your Non-Clinical Team
Your Clinical Team
There is no escape from this crushing logic.
If you and your family are prepared to pay – please go back to yesterday’s blog post and calculate your reduced profit margin.
If your non-clinical team are to pay – then announce a pay cut for them all – or draw straws this lunchtime and sack the person with the short straw (make sure the well poisoner gets that straw).
If your clinical team are to pay you have to reduce their percentage and/or ask them to share 50% of the membership plan discount AND 50% of the finance charge (remember that in the calculation above, I only paid the associate 50% of the original price).
If your suppliers are to pay – start calling them and asking for a price reduction – at least you will give them a good laugh to end the week.
If your patients are to pay – then you have to increase your RRP to absorb the membership plan discount and/or the finance charge.
Price of a Cerec crown to protect profit = £500.00
Add 20% membership plan discount (500/0.8) = £625.00 for non-members.
Add 7% zero finance charge (625/.93) = £672.04 for non-members with finance.
Or (500/.93) = £537.63 for members with finance.
That’s the right price to protect your profit (and the associate gets paid on a £500 nominal value).
“nobody in my post code will pay that much for a crown”
“when my competition get wind of that I’ll sink”
” you can’t penalise people who want credit”
“my associates will never accept that”
I’ve heard it all and more besides.
Anyone in serious business will tell you that protecting your margin is more important than setting your price.
So the only options you have are to either increase prices, reduce somebodies earnings or stop making those offers.
Let me leave you with a Golden Question:
If I make this decision, how will it affect my profit margin?