Don’t reduce the price in your head
Ashley Latter explains how a 10 per cent reduction in your prices can add up to a 29 per cent drop in profit
Almost all of the dentists I have ever coached have reluctantly admitted to being guilty of the following scenario. Faced with quoting a price for a treatment, they have started off with a figure of £400, which by the time they’ve actually uttered the words, has somehow come out as just £350. For some inexplicable reason, they’ve found the prospect of talking money so uncomfortable, that they’ve actually offered a discount, without even having been asked for one! In this case a whopping £50 – the equivalent of almost 15 per cent.
Those same dentists have also admitted to carrying out a basic procedure free of charge because it would only take them a few minutes to complete.
Whenever I deliver any of my courses, I am staggered by the number of cases of undercharging that are revealed. At a recent ethical sales course, one of my clients described how he used to knock £30 off each filling. His price listed it at £130 but he would instead ask for just £100. This represents a substantial (23 per cent) reduction, which patients hadn’t ever requested. It means that your patient is getting a discount and they don’t know about it. If you are going to play the above game, at least tell them that they have had a discount.
What does a 10 per cent reduction in price do to your margins?” Most dentists believe that it will equate to a 10 per cent reduction in profits, but the reality is much worse!
By exploring this one example alone, we calculated that it is costing his practice around £10,000 per year! This particular dentist had only been in business for five years but when I pointed out that he’d already lost £50,000 through this one unnecessary discount, he was stunned. He was then ashamed to admit that there were many other treatments where he would regularly undercharge his patients; by now though he was far too embarrassed to admit what they were.
On my programmes I often discuss a concept called the “10 per cent rule”. It concerns the harm that a regular discount can do to a business. I ask the question: “What does a 10 per cent reduction in price do to your margins?” Most dentists believe that it will equate to a 10 per cent reduction in profits, but the reality is much worse!
Here are some examples of this important concept:
For every £100 of sales, if your costs are £65, it leaves a gross margin of £35. If you were to consistently reduce your prices by 10 per cent it would mean your sales are now reduced to £90, while your costs will remain unchanged. Your gross margin will then become £25. It means that in effect your profits will have been reduced by a staggering 29 per cent! In this case therefore a 10 per cent reduction in price is equal to a 29 per cent reduction in profit. I am certain that most of you have heard the phrase: “Turnover is vanity, and profit is sanity.”
Now let’s look at another example of rising costs. The introduction of additional bureaucracy, such as Care Quality Commission south of the border, and a significant rise in overheads over the past few years, have had a major impact on dental practices. Using similar simple figures as before, let’s assume that your total sales are £100, while your costs are £65, again leaving a gross margin of £35. Costs then go up to £70, the equivalent of a 7.7 per cent increase. If your prices don’t increase to reflect this, then the gross margins will come down from £35 to £30. That equates to a drop of around 15 per cent.
These examples demonstrate very clearly that even a small differential in cost can have a dramatic impact on profit. Many dentists I’ve spoken to have reacted to the ongoing recession by freezing their prices, despite an increase in their overheads. They are fearful that any increase in price would risk losing their patients altogether. Worryingly however, by not increasing prices to keep in line with rising costs, can in time only lead to bankruptcy!
Recently over dinner, a dentist who was half way through my two-day ‘Ethical Sales & Communication Programme’ admitted to me, because of the credit crunch, that he had not increased his prices for five years. During this time his costs had risen significantly, and his take home decreased significantly.
He was in mid 50s, was working incredibly long hours, with very little time off and, he was extremely miserable. Yet a small increase in his prices would make a significant difference to his bottom line, to his self-worth and also allow him to take some time off and invest in the practice. Because of the loyalty and good will of his patients, I very much doubt whether they would be many complaints either.
- Stop reducing the prices of your treatment in your head. Make sure the price that’s in your head is the same one that comes out of your mouth.
- If you do give a discount, at least tell the patient.
- I am not an accountant, but get a handle on your costs. Know your numbers.
- Make sure that you regularly review your price structure. If you don’t, it will have a serious impact on your bottom line.
About the author
Ashley Latter is internationally renowned for helping dentists and their teams improve their communication and ethical sales skills, so that practices can create more opportunities to deliver the dentistry that they love to do and their patients want. He writes a fortnightly email newsletter that is read by more than 12,000 dentists worldwide. To register for this free of charge and to read other articles similar to this topic, please visit his website www.ashleylatter.com