Is your practice profitable? Most medical aesthetic practices can answer this question quite easily. A review of accounting statements or tax returns will tell you if your operation is in the red or the black. But is each patient you treat profitable? And did the new dermal filler campaign you just completed bring the return on investment you originally estimated? For many practices, these questions are more difficult to answer.
Taking the time to determine the cost of acquiring new patients, as well as the potential long-term profit margin for specific patients groups, can help you fine-tune your pricing. It can also streamline operations and zero in on your most successful marketing avenues, culminating in increased profitability.
Cost Per Acquisition
Marketing and advertising are integral expenses for medical cosmetic practices, and more media and marketing agencies than ever before are vying for your advertising dollars.
Most small businesses use a combination of guesswork, the amount of funds available and gut feeling to set their marketing budgets. However, understanding the lifetime value (LTV) of a patient and the cost to attract a new patient provides a more concrete view of the most and least successful marketing avenues.
Customer acquisition costs (CAC) are calculated by dividing acquisition expenses by the total number of new patients.
Step 1. Track your expenses for every advertising and marketing campaign you launch to bring in new patients. This includes the cost of salaries for personnel or outside agents organizing and implementing the campaign, as well as any materials or ad space purchased.
Step 2. Track how many new patients book a procedure as a result of that campaign. You can do this by asking—and training staff to ask—new patients how they heard about your practice.
Step 3. Divide the cost of each campaign by the total number of patients who actually purchased a procedure or product from your practice as a result of that marketing effort.
The resulting number will tell you the cost per acquisition. For example, if you ran an ad in a local newspaper for $1,000 and you gained four new customers, your CAC would be $250.
Not too surprisingly, there are different opinions as to what constitutes an acquisition expense. For example, rebates and special discounts do not represent an actual cash outlay, yet they do have an impact on cash flow.
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Profit Per Patient
Once you’ve determined the CAC, you need to know if that cost justifies the profit realized per patient. If one new patient costs $250 to acquire and she purchases $1200 in products and services at a profit of $400, you have identified a successful campaign. You spent $250 and made $400. Because medical aesthetic patients are often repeat visitors who come to your practice every three to six months for injectables, facials or IPL treatments, you also want to consider the LTV of new acquisitions when examining costs. In order to determine the LTV, you need to compute the gross profit margin expected to result from that customer over the lifetime of the relationship.
For example, if your typical Botox Cosmetic patient stays with your practice for five years and spends $600 every six months for injectables at a profit of $200 per treatment, the lifetime value of a patient seeking Botox Cosmetic injections is $6,000 and the lifetime profit to your practice is $2,000. These examples offer a basic overview of CAC and LTV. There are several online tools that practice owners can use to determine the CAC and LTV of their patients, including the Harvard Business School Customer Lifetime Value Calculator.
The Most Profitable Patients
The above calculations give you a general overview of patient profitability, but as practice owners know, not all patients require the same amount of support. A patient who visits your facility only sporadically and does not require a lot of service may be a good patient—in terms of profitability—while another patient may spend more per visit, but require so much support and outreach that she ends up costing the practice money.
The best way to evaluate the profitability of a specific patient or patient group is to keep track of all interactions with that patient or patient group over a two- to four-month timeframe. Many practices determine procedure costs based on the cost of the service provider and the product used plus a percentage of their overhead costs. Missing from this measurement is additional support, including the receptionist’s welcome, coffee services, followup calls and visits that ultimately make up the total cost required to meet the patient’s needs.
An analysis of patient profitability compares the costs of all the activities used to support a specific patient or patient group with the revenue generated by that patient or patient group. To determine the total cost of performing a particular procedure, the expenditures for all professionals involved (i.e., the support staff, supplies and a portion of the overhead costs) must be considered. To apply a similar strategy to determine the cost of servicing a particular patient, practice owners can use “activity-based” costing.
Activity-based costing requires an extensive analysis of the amounts spent by the practice on both the procedure and service to the patient. This differs from general accounting processes that reveal the cost of operating a practice over a set period of time—a day, a week, a month or a year—and dividing that figure by the total income in that timeframe to produce an average cost.
To perform an effective activity-based cost accounting review, the help of an accountant or CPA is advised.
Converting Unprofitable Patients
The first step in turning unprofitable patients into valuable assets is to determine whether the relationship can be improved. A practice owner or manager who believes in holding onto every patient—no matter what the cost—may never see the medical aesthetics business reach its maximum earning potential.
There are a number of strategies that can be used to turn unprofitable patients into profitable patients, including:
- Pricing services and products more effectively
- Improving internal processes to reliably predict the impact of business decisions on total system costs
- Negotiating discounts and payment terms with the patients (i.e. if there is a problem with slow pay, practices may require payment at the time of service)
The one question many practice owners or managers often ignore is whether their best business decision may actually involve letting some of their least profitable patients go elsewhere. While this may seem like an illogical suggestion (particularly in a bad economy), having the wrong patients can hold a practice back from real success—despite the temptation of short-term profits.
If the problem is not addressed, the facility may find itself in a difficult position, with minimal profit margins and an inability to accept new and more profitable patients.
Accounting for acquisition and service costs helps practices develop more targeted marketing campaigns and more realistic pricing strategies. When detailed enough, that same cost accounting can also reveal who your most profitable patients and patient groups really are.
Mark E. Battersby is a Philadelphia-based freelance writer specializing in financial and tax-related topics.