One of the most emotive aspects of running your own business, particularly if that business has been started by you in the first place, is pricing.
The requirement to set pricing at an appropriate level based on all aspects of the business and all the challenges that exist in running a business is one of the most intellectually and emotionally challenging parts of the whole project.
It is also one of the areas that (in our experience) Dentists find the hardest to manage.
There is a long-held condition in dentistry, described to me many years ago by my friend and coach Chris Barrow, but I don't think it was invented by him called 'mental-fiscal drag'.
For the description of mental-fiscal drag, imagine this… a dental associate who is paid a percentage of the income they generate is in surgery with a patient considering a large treatment plan (For argument's sake, let's say a £10,000 plan). When the patient asks the associate about the cost of the plan they're considering, the associate has a problem explaining the exact price and instinctively drops it by 10% to £9000.
To the associate, this doesn't seem to be a problem; they will just earn a little bit less, but to a practice which is making 15% profit off the treatment plan, their profit has just been cut by 66% because the associate dentist was uncomfortable explaining the cost to the patient honestly.
This demonstrates how pricing is emotionally wrapped up in clinical management and the care of patients.
There has recently been a flurry of calculators that have hit the market to allow dentists to start calculating their pricing based on individual products. See Chris Barrow's Invisalign calculator to show you whether your Invisalign treatment is profitable or not and at what level it may become profitable (This might be a depressing calculator to use for many practices).
This is because, historically, dentists have braced things in two specific ways.
1) Around the price itself (If the number is big enough, it must make money)
2) Based around their direct local competitors (we can't price higher than Bob down the street because all the patients will go to Bob).
Pricing in these ways is utterly nonsensical because the risk is you will end up losing money on specific product lines in order to keep the patients coming through the door.
Again, in relation to my friend and coach Chris Barrow, I previously had an associate in the practice who was losing the practice money. It was only when we actually calculated correctly what each surgery cost to run and how much profit they were making that we realised the associate was losing us money.
The advice from Chris at that stage (and that was 15 years ago) was to let the associate go.
In my discussions with Chris, I explained to him that there was a risk that the associate would just go down the road to practice close by and start working for them.
"Then let the associate lose their money" was Chris's reply.
These stories are designed to demonstrate the ridiculous nature of ad hoc, just-in-time pricing that dentists often use in their practice.
This blog post is designed to introduce you to the concept of proper financial management, which allows you to calculate prices based on the 'why' of your business, how much you hope to generate and what you hope to do with that money.
So, the first thing you must understand is what you're for, and that is why we discussed the why, the vision, the values, and the mission.
If your practice exists to leverage as much money as possible out of the patients who walk through the door, then you need a financial model that works like that.
If your practice has a different agenda and your business exists for different reasons, you do not need to be so aggressive, and you can set your financial management up in a different way.
The second thing to understand is that you must know exactly what it costs to run your surgery on a day-by-day and hour-by-hour basis. Only then can you decide how much to charge for specific product items.
The next thing to understand is that turnover is vanity and profit is sanity; it doesn't matter if you're charging £10,000 for a single crown if it costs you £11,000 to produce it,
Once these things are set up, you can start to look at the variable costs for the provision of the treatment, the cost of your surgery, the materials, the receptionist, the heating and the rent. These will all be factored into your fixed costs and can be used to calculate your operating surgery costs per day.
You can review operating surgery costs per day on a quarterly basis; therefore, you will know that you're in the right ballpark with your fixed costs or your operational costs. However, you like to describe them.
Then, you will be able to put in place a variable cost model that allows you to calculate the price based on lab work, implant components, or orthodontic components.
Once this is in place, you can then set an appropriate associate percentage to make the percentage win for the practice that you expect based on your financial model.
This is the creation of a financial model.
Initially, this is onerous. Setting up individual cost centres for individual products, but if you do not do this, the risk is that some of your products will subsidise everything else. For example, if you do a reasonable amount of implant work, your implant work will be subsidising your general dental associates.
If this is the case, it's fine until the implant work drops off, and the rest of the products you're filling your book with don't make any money.
We use a dashboard system to calculate this, and once the project has been set up properly and the dashboard system is in place, it's easy to raise prices at regular intervals and when required and by small increments to cause less damage to the psychology of the patients and the team.
It's actually possible in our practice now to raise prices without the team even knowing about it (We don't do this because we like to give them information around this to describe to the patients).
You should be reviewing prices on a quarterly basis in your practice because your suppliers and your competitors are doing this.
You cannot fall behind because of mental fiscal drag; you must keep in check with the market and understand that profit is oxygen to your business although it may not be the meaning of life for your business, it is essential for reinvestment for staff wage increases and for the overall health and stability of a well-run business.
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