FIGURE 3.1
5% Matters—More Than Most Think
In this chapter I want to take you through a case study of Dr. Taylor’s business’s numbers (see Figure 3.2). This chapter is filled with math and numbers, which I know is not a strong area for everyone, but stick with me here, these numbers can literally change your life.
Let’s look at Dr. Taylor’s numbers today:
• Dr. Taylor has 3,800 active patients.
• The average cost to acquire a new patient is $213.00.
• The revenue for each new patient is broken down over the first three years they do business with the practice. Most patients stay much longer than three years, but for this case study, we stopped at year three for average patient revenue.
• Average first-year revenue: $893.00
• Average second-year revenue: $1,215.00
• Average third-year revenue: $1,596.00
Now, before I go on, I want to point out that in some dental practices, first-year revenue can be skewed on the high side when compared to similar businesses because of the patient who comes in and needs thousands and thousands of dollars in dentistry to fix years of neglect.
FIGURE 3.2
As you can see from the numbers, the longer a patient is with this practice, the more money they spend on average. This trend of longevity continues with the average patient at this practice being worth $1,900.00 per year in year five. See Figure 3.3 on page 16.
At a 17% attrition rate, Dr. Taylor was losing 425 patients per year or 35 patients per month. According to a 2014 Dental Economics survey, the average dental practice adds 26.39 new patients to their practice per month or 317 new patients per year. With a 17% patient loss rate, if Dr. Taylor was simply adding this average number of patients to his practice each year, his total patient revenue and his patient base would be declining year over year. Most try fixing this by substantially outperforming the average for acquiring new patients, as if that were the only fix available. But attracting and seducing strangers is hard work. In business, it tends to be difficult and expensive. Investment in retention, by comparison, can be a bargain. Simply, there is often more profit in retention than in acquisition.
FIGURE 3.3
Of course, Dr. Taylor did focus on patient retention, but if we spend a minute on this hypothetical example, we would see that he needed to get 108 new patients, on top of the average 317, at a cost of $213.00 per new patient, for a total additional investment of $23,004.00 just to stay even. Of course that $23,004.00 comes straight off the bottom line, and frankly, it is demoralizing to work all year and spend a ton of money on marketing, only to end up in the exact same place you started. You can find yourself a hamster running on a wheel, stuck in place, yet running very hard!
Let’s get back to the case study. If we invest in patient retention and are able to bring the percentage of lost patients down from 17% to 12%, a bit of magic starts to happen. The 12% patient attrition equals 300 lost patients per year or 25 lost patients per month, which, compared to losing 425 patients, is a huge difference of 125 people! But that doesn’t tell the whole story.
First, we need to look at the cost of replacing 125 additional lost patients. To get that, we take the $213.00 that it costs to acquire a new patient and multiply it by the number of lost patients (125). The total cost to replace the lost patients with new patients is $26,625.00.
125 Lost Patients × $213.00 Replacement Patient Cost = $26,625.00 Cost to Replace Additional Lost Patients
Next, we also have lost production for those 125 patients who left the practice. Using the average annual revenue of a second year patient (as seen in the previous numbers), you see those lost patients each represent at least $1,215.00 in lost revenue to the practice.
125 Lost Patients × $1,215.00 Lost Revenue Per Patient = $151,875.00 In Lost Revenue In Year One
Next, we have to look at the lost referrals. Dr. Taylor’s practice gets 27 new patients from referrals every month. So, if we do the math, we can figure out those 125 lost patients also equals 16 lost referrals per year. Which is another $14,288.00 per year in lost revenue.
16 Lost Referrals × $893.00 Lost Average First Year Patient Value = $14,288.00 Additional Lost Revenue
I could easily go on from here. We could add up all the marketing money we’d need to replace all of the patients just to get the practice back to 2,500 active patients each year. We could talk about multiyear values or lifetime values of a patient. We could talk about the referrals we would have gotten from the referrals we didn’t get because we lost the referring patients, per Dan’s Chapter 12 on the Endless Chain. It is a nearly endless calculation. But instead, let’s stop here. Suffice to say the difference between focusing on customer/patient retention and not focusing on retention, for this practice, is $192,788.00 per year.
$26,625.00 Cost to Replace Patients + $151,875.00 Lost Revenue from Lost Patients + $14,288.00 Additional Lost Revenue from Lost Referrals = $192,788.00 Total Lost Revenue
That’s $192,788.00 lost if Dr. Taylor were to ignore or fail to invest in and assertively manage patient retention. To add insult to injury, that $192,788.00 lost is nearly all profit. The practice has already paid all of its overhead, rent, electricity, and insurance. The practice wasn’t 100% full on its schedule, so most of the payroll has already been paid for. Also, for a business owner, it really is more than lost money, it is lost peace of mind; it is lost nights of sleep spent worrying; it is lost vacation time with your family.
Moving a needle by only five points seems small. But $192,000.00 in this instance is not small at all! If you’ll do the same calculations for your business with your facts, I’m certain you’ll make the same discovery: A small move of your needle can have big net financial impact.
Dan Kennedy owns a lot of racehorses, and he likes to wager now and then on the ponies and on sports. You can’t be around him very long without winding up in conversations about “odds.” He says that gambling and direct marketing have two things in common: math or odds, and behavioral psychology. More people are familiar with slot machines than the races or sports betting, so here’s a little trivia he passed on to me about slot machines. Keep it in mind the next time you visit a casino. Payback percentages and payback frequency vary by type of machine. On average, the house’s edge is about 4% on $10 denomination machines, 6% on $5 machines, 8% on $1 machines, 10% on 50-cent and 25-cent machines, 12% on 10-cent and 5-cent machines, and as much as 17% on penny machines, but then, it shifts more, and worse
