Roger P. Levin, DDS, MBA
Most businesses do not realize that the majority of profits come from a minority of products and services. This also is true in the dental industry. While most dental procedures still are single-tooth appointments, many dental practices realize their greatest profits from a minority of their services.
Majority vs. minority
The majority of the profitability in dental practices can be analyzed by looking at several categories. Each category represents a way to segment your practice in order to better understand where profitability occurs. Once you`ve performed such an analysis, strategic-management decisions can be made to enhance profitability even further.
When performing an analysis of profitability, the first segmentation that should take place for this analysis is in the actual services you provide. For example, many general practices have 30 percent or more of their revenue in crown- and-bridge services, but their practice profitability for crown-and- bridge may be as high as 55 percent. While this will vary for each practice, it is interesting that the services that contribute to the majority of practice gross revenue often contribute to a higher percentage net income or profitability.
In analyzing the services your practice provides, you need to look at the following three factors.
(1) List all services that you perform per month.
(2) Determine which services represent the top 20-30 percent of overall practice production.
(3) Evaluate the profitability contribution of these services.
Keep in mind that the profit margin on the more productive services usually is higher than that on less productive services.
There are a number of reasons why approximately 30 percent of the services contribute to 65 percent of revenue. When breaking out the more profitable services, we want to include the total fees of the more productive services, the length of the appointment, contribution to variable costs, etc.
At this point, these variables do not really matter. What is important is that you have now identified which services are the most profitable for the practice. Keep in mind that production is not the key factor in business success - profitability is the key factor. The same concept works equally as well for specialty practices.
The second method of segmentation is to look at the number of teeth treated per appointment. You will find that appointments that are longer in length and which involve multiple teeth only make up approximately 20-22 percent of the procedures in most general practices. Once again, these multiple appointments may contribute to 50 percent or more of practice profitability. While this will be a lower percentage in practices that have a higher percentage of single-tooth appointments, the majority of practice profitability often comes from the larger cases.
You can analyze this scenario the same way as described above by listing all the appointments that involve services for multiple teeth into categories such as five or more teeth treated during an appointment, four or more, three or more, two or more, and single-tooth appointments.
Every practice has natural delineations that contribute to profitability. What most business people and dentists do not realize is that a minority of products, services, or types of appointments contribute to the highest level of practice gross revenue. As a result, they also contribute the most to practice profitability.
What do you do with this information? You have two options:
(1) Find ways to perform a higher number of your most profitable procedures.
(2) Find ways to increase the revenue from your less profitable services. Levin Group has typically found that clients are far more successful when increasing option #1 above and focusing on the most productive and profitable procedures.
Roger P. Levin, DDS, MBA, president and CEO of The Levin Group and the Levin Advanced Learning Institute, provides worldwide leadership in dental management for general dentists and specialists. Contact The Levin Group at (410) 654-1234.