Every month, I talk to practice owners who tell me business is great, revenue is up, and their schedule is full. Then I ask what their actual profit margin is, and they go silent. Or, I get a number that turns out to be their bank balance.
It may seem basic, but revenue growth and profitability aren't the same thing, and most practices we work with track only one of them.
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I’ve walked into practices doing $2 million a year that were barely breaking even because nobody was looking past the top line. Revenue was climbing every quarter, so everyone felt like they were doing amazing. But the real bottom-line numbers were flat or shrinking. The growth was masking the profit leak.
This happens because most practices run their books using one blended number for expenses. Everything ( including cost of goods sold, provider compensation and support staff pay) gets lumped into “expenses” and subtracted from “revenue,” and whatever’s left is called “profit.” That single number tells you almost nothing about where the money is actually going or which parts of your business are carrying the weight.
What to do instead: Break your cost structure into three line items, not one
At Terri Ross Consulting (TRC), the benchmarks we use to evaluate practice performance include:
- Cost of goods sold (COGS) should run around 30 percent of revenue. If your COGS is creeping past that, look at pricing, purchasing, inventory management and product utilization. You won’t identify the problem if it’s buried inside one big expense line.
- Direct cost of labor (what you’re paying the provider actually delivering treatments) should stay under 20 percent of revenue.
- Total payroll costs, including your support staff, should stay under 30 percent. Direct provider labor and total payroll are two different KPIs for a reason. A practice can look fine on total payroll costs and still be bleeding money because one provider’s compensation doesn’t match their production.
Tracking these metrics separately gives you a much clearer picture of what is driving or eroding your margins. Using TRC’s financial benchmarks, we target a gross profit margin of 60-70% percent for a healthy med spa and for a plastic surgery practice 70-85%
Gross margin ≠ net profit margin.
If a $1,000 treatment has $300 in direct COGS:
$1,000 revenue − $300 COGS = $700 gross profit = 70% gross margin.
You still have payroll, rent, marketing, software, insurance, equipment, administrative expenses, etc. coming out after that.
Calculate revenue per hour by provider, not just by practice
At TRC, we also benchmark revenue per provider hour to evaluate productivity and profitability. The benchmarks we use are:
Surgeon: $3,000–$4,000 per hour
Physician doing medspa services: $1,400+ per hour
NP or PA: $900–$1,200+ per hour
RN: $600–$1,000 per hour
Aesthetician doing medical procedures $500+
Aesthetician doing facials, peels etc $250-35
If one of your providers is consistently below their benchmark, that provider may be dragging down your real profitability, even while your total revenue keeps climbing.
I’ve seen practices discover after calculating revenue per hour by provider that their busiest provider was also their least profitable one. A full schedule does not always mean the highest margin. These data points often go unnoticed because the practice was never analyzing profitability at the provider level.
The bottom line …
A practice can be growing while still leaking profitability. The only way to know what is actually happening is to look at cost of goods, labor, total payroll and revenue per provider hour separately, every month.
If your financials aren’t broken out this way now, fix that before you spend another dollar trying to grow revenue as more revenue won’t solve margin issues.
