What is the Lifetime Value of a Patient to Your Dental Practice?
A dentist without patients does not have a great future. In addition to being “customers”, patients are also the “raw material” of a dental office. Like any business, no raw material equals no revenue.
There are two key economic factors to consider with respect to having adequate raw materials or patients.
- How much does it cost to acquire them?
- How much does it cost to maintain and keep them?
So where should you focus? Should you make sure you are acquiring new patients or keeping the ones that you do have happy and engaged with the practice?
In order to determine what to decide, you need to know what the Lifetime Value (LTV) of your patient base is. LTV is defined as the value of a patient to the practice over the anticipated practice life of the patient.
The LTV of a patient will depend on a number of factors, but primarily it will depend on the kind of dentistry you do and where you do it. Fee guides, or the absence thereof, are different from country to country, state to state, and province to province. As a reference point, I am going to use Ontario, Canada which is the region I know best.
In Ontario, the average annual gross revenue per active patient is about $650, with a normal high of $750 and a normal low of $500. This excludes any highly performing general practices which could generate upwards of $1,000 per active patient per year, and it excludes underperforming practices that would be lower than $400 or $500 per active patient per year.
Let’s make a couple of assumptions:
- An average gross revenue per active patient of $650,
- The fee guide increases by 1.5% per year (but likely higher in 2021),
- An interest rate of 2.45% (as of early 2021),
- That the incremental (not to be confused with overall) net profit after paying all dentists as if they were associates is 50% of gross,
- And the life span of a patient is 20 years.
Making those assumptions here’s what we have:
- The total gross revenue per patient would be $16,600
- The net present value @ 5% of that gross would be $9,900
- The net present value of the incremental profit would be about $5,000 ($2,800 over 10 years)
I am going to guess that this is less than what you would have thought. The other factor to consider is that we have assumed this revenue would automatically continue for 10 to 20 years. In other words, we have discounted the risk that this might not happen, that a patient may not stay with the practice for 10 to 20 years or that there could be a material change to the fee guide.
So, what does this tell us about buying patients as a method of growth?
Patient charts in downtown Toronto have sold for over $1,000 per chart. A more typical value outside of Toronto would be $450 to $650. These values tend to be market-driven as much as economically driven, however, what would the economics of buying patients actually be?
Based on what we have presented above, the incremental contribution to your net profit over 20 years would more or less average $325. Let’s assume that you buy that patient for $600 and let’s suppose you finance this over ten years (you wouldn’t likely do this, but you might if you were buying 1,000 patients). Your payment on a $600 loan over 10 years @2.45% would be $67.70 per year, your annual incremental profit would average about $415. That is about a 6.13 times return on investment or a minimum payback period of less than 2 years before tax.
Let’s also consider how patients are usually purchased. Typically there is an upfront payment of 25% to 50% of the amount equal to the cost per patient, times the number of anticipated patients to be purchased. This approach reduces the acquisition risk in most cases by 50%.
The metrics supporting the patient purchase process is overwhelming. If you can buy them for a reasonable price then buying them is a no brainer.
What about the initial question of whether it is better to focus on acquiring or maintaining?
The answer to this is obvious – you should be doing both.
If you don’t take steps to maintain your patient base, then you risk losing the ones that you just purchased. Under either scenario you need to make the effort to maintain the goodwill of your practice – it is not a matter of one or the other, you need to do both.
For more information on how to find patients to acquire, contact Derek Hill at firstname.lastname@example.org