How much is a patient worth? Part I

Editor's note: Richard Geller's column, Marketing Madness, appears regularly on the DrBicuspid.com advice and opinion page, Second Opinion.

One of the most basic decisions in your practice may be how much to spend in order to attract new patients.

To answer that question, you need to know two things:

1. How much revenue will a patient bring in?
2. What does advertising cost per patient?

Then you can bring in as many new patients as you can serve. In this article, let's focus on question No. 1. In my next entry, I'll turn to question No. 2.

When I first started marketing, I would purchase a list and mail out direct mail. I might spend $20,000 on a mailing campaign, and then I'd sit back, bite my nails, and wait and wait and wait.

I tracked each person who responded and which ad they responded to. And I kept careful track of that $20,000 and how much each new customer brought in against that $20,000. Eventually, I found that the money I spent on advertising was a pittance compared to how much that customer brought in.

Now, if you present it this way in your dental practice ...

YOUR ACCOUNTANT WILL THINK YOU ARE INSANE.

Think about it. If you tell your accountant, "Sue, each of my patients will bring me in $1,000 this year on average. So please put $1,000 times 1,000 patients, or 1 million dollars, on my balance sheet."

Sue would think you should be committed. And yet, this is not a stupid request. It's just that accounting has been slow to catch on to the concept of how much a customer is worth.

The whole idea of what accountants put on your balance sheet as "book value" is stupid. What difference does it make if your office furnishings cost you $200,000, and you have $45,000 in handpieces and other equipment?

What really matters is the lifetime value of your patients. As marketers say, "It's the list, stupid." In this case, your list is your roster of active patients and how much they pay you on average.

Calculating the lifetime value of a patient takes some time. You can start by calculating the annual value. And you have a choice of two ways: gross revenue or gross margin.

The easiest method is gross revenue per patient: Simply divide all the money you took in by the number of patients you saw in a year.

To derive gross margin, you do the same thing, but from your billings you subtract the "cost of goods sold" (such as lab fees, materials, and consumables).

A doctor could go through maybe five or 10 procedures and come up with these costs for a rough gauge of gross margin. For example, if she collects $1,300 for an implant, and it costs her $600 in cost of goods sold to place an implant, her gross margin would be $700 ($1,300 - $600 = $700).

(Fixed costs, such as rent and salaries -- known as "below the line" expenses -- don't change much with the number of patients, so you can leave them out of the calculation.)

To accurately calculate the lifetime value of a patient, you would need to know how long that patient was going to stay with your practice. That's hard to predict until you've been in business awhile, because every practice is different. But after a few years, you can tell how many patients have become inactive each year.

That's why it's important to keep track of which patients were attracted by which ads, how much you paid for the ads per patient, and whether the patients stayed active long enough to make the ads cost-effective. In my next entry, I'll explain more about how to do that.

You won't get a clear picture of how much each patient is worth until you have a few years of data. Until then, you may want to follow this rule of thumb commonly used in dental marketing: Simply spend 8% to 15% of an average year of production on advertising.

And get my free special insider's special report on dental advertising strategies that let you eventually quit dental advertising altogether at Cases4Dentists.com.

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