Incremental Revenue – A Series – Part 2 – Roots
While we have determined that incremental revenue can increase practice profit and value significantly, I need to explain in general terms the factors that contribute to incremental revenue. The concept of incremental has to do with minor changes made to an entity that already exists. If a child’s height were 91cm several months ago and is now 95cm, the additional 4cm would be the child’s incremental height from the first to the second measuring. If a dental practice were generating $750,000 of gross billings and, for some reason, increased that to $775,000, then the $25,000 would be the practice’s incremental revenue. This article will explore the components necessary to create incremental revenue in a dental practice.
A dental practice creates incremental revenue when it does something that creates new additional revenue. Any of the following actions will generate additional revenue:
- Billing existing patients for additional services
- Adding more patients and billing them the same as existing patients
- Adding more patients and billing them for additional services
- Adding more patients and billing all the patients for additional services
Adding more patients and increasing the scope of services rendered will provide the most significant increase in incremental revenue.
Gross billings in a dental practice are a function of two variables, the number of active patients in the practice and the amount of service provided to those patients. The only way to increase gross billings is to increase either or both of those functions.
You need to think of patients as two different entities. Patients are “customers,” and they are, in a sense, your raw materials. If a widget factory has no steel, it makes no widgets. If a dental office has no patients, it provides no services. Using that analogy, having more raw material means you can produce more widgets or provide more dental services.
Incremental new patients are patients other than your normal flow of new patients, such as patients you might purchase from another dentist. There could be an unusual influx of patients from many sources, such as a new apartment building across the street or patients leaving an old practice on mass to join your practice.
Fortunately, there is a valuable metric for measuring the amount of service any practice provides to its patients. The Average Annual Revenue per Patient (AARP) measures the average annual revenue each patient contributes to the practice’s overall revenue. Differentiating dental and hygiene revenue even allows you to calculate the average annual hygiene and the average annual dental revenue per patient. The only other thing you need to know to determine the AARP is the number of active patients in the practice. Depending on the provincial location (sticking to Canada), it is possible to determine the normal AARP for any practice. The AARP can be separated into dental and hygiene components allowing for an even more accurate analysis.
I will be examining all things related to incremental hygiene revenue and dental revenue in an upcoming article, so stay tuned. The important takeaway here is the in order to maximize overall incremental revenue; you need to be aware of what you are producing on an average annual basis with all of your active patients and increase that level of service.
The takeaway here is obvious. When you think about incremental revenue, you need to be thinking about securing more patients and providing more services to all of your patients, including new and old. The best approach would be Option #4 above, more patients and more services to all of your patients. If you have all the patients you can handle, perhaps you only need to increase the level of your services. If, on the other hand, you are providing all of the services possible (unlikely), perhaps all you need is more patients. The dynamic can be a separate or a mutually inclusive arrangement. It works best as a contemporaneous set of events. In future articles, we will explore different ways to both increase your new patient flow and your level of service.
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