Dental Practice Management- Pricing Part III

In the dental practice management series lets continue our discussion about pricing.

We’ve been talking about my favorite Indian restaurant (unfortunately now over 3500 miles away from my new home in Miami!).  Chances are you’ve interacted with a business that may have the same problem of Vij and that is pricing not being adjusted to help match demand.

So, how much business could Vij lose (if he raises prices) and still be more profitable?

Last time, I discussed how one goes about raising a price to see what happens to demand.  In essence, figuring out how much pricing sensitivity there is to your business.  Whether it’s fantastic Indian food, high end prostitutes, or reconstructive dentistry, there is a lot MORE price flexibility then most understand or will every be willing to explore.  Let’s face it most business owners are terrified of being in charge of the business and dental practice management.

Vij could easily start with a 20% price hike and likely see no drop in business.  Most dentists would be fearful of “losing all their patients and production” if they did such a thing, much less a restaurateur, so let’s look at the numbers that really tell the story on this.

We will pretend that Vij has an amazing profit margin of 40% (which is doubtful for a restaurant) but there are plenty of dental practices still holding on to a 40% margin—most of our member practices doing the biggest cases have 50-60% margins on their large cases.

So how much business would he (or you) have to lose to not make the same amount of profit if prices were increased by 20%?  Answer:  34%.   NOT likely.  AND the higher the overhead, the more business you would have to lose, before you were back to even.

He’s got a great product and due to such it’s highly unlikely that his customer numbers would decrease.  Even if he lost 33% of his revenue, he’d still be more profitable than he was previously.   The truth is he could likely increase prices by 50% before there would be a significant budge in demand.  Since fixed and variable costs won’t change related to pricing (except reprinting the menu a couple of times), there’s a huge increase in bottom line profit.  225% to be exact for his scenario!

For someone like Vij, the odds are that franchising is a concept mulling around in the back of his head but he likely asks “where will I find time to figure that out.”  Dealing with demand and exploiting price insensitivity is exactly how one creates the time for systematizing and making the business franchise ready.

These concepts from the Harvard Study can also routinely applied to dental practice management since our overhead models easily get more out of control and because of such fees play an even bigger role in fighting overhead.  If you are locked into 100% insurance, that’s another issue for another day…….

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