Dentistry Today Management Price Point Testing: How Do We Really Know What to Charge?
Management

Price Point Testing: How Do We Really Know What to Charge?

  • March 1, 2002
  • 15 minutes read
  • 23 years ago

What is great clinical dentistry really worth? What’s it worth to you? Equally important, what’s it worth to your patients? One of the single most important factors directly influencing your level of financial success (or stress) is your fee structure. For purposes of sanity, enjoyment of your chosen profession, and bottom line profitability, I’ll assume that you’ve accepted the fact that to truly prosper, you set your fees. Insurance companies don’t. If you are beyond the insurance nightmare, or at least considering moving away from the stranglehold, read on. What we’re about to explore could be just the “gem” to fully fund your retirement plan, and then some! 

Many years ago, Dr. Omer Reed defined a “fair fee” as any fee upon which the buyer and seller could agree, without remorse. Put another way, the fee is truly fair if both patient and doctor feel that they’ve received more than fair value out of the deal. From the patients’ perspective, the “perceived value” will include the final clinical results, as well as a host of other less tangible but equally significant factors. These would include, but not be limited to: level of customer service, convenience of appointment hours, and ease of financial arrangements offered. Value perception, of course, will also take into account how the treatment makes them feel about themselves. This factor would certainly not be limited to just cosmetic/aesthetic dentistry. With anterior aesthetics, the added-value benefits are obvious. However, don’t short-change the powerful effect that rehabilitating posterior dentition may have on the way patients think about themselves. From phobics feeling a sense of accomplishment in having overcome their deepest fears, to the less financially fortunate realizing a dream of rebuilding their personal health, our incredible profession frequently offers far more than meets the eye.  

THE KODAK STUDY 
Although I’m quite certain that most dentists have heard about the Kodak Accounting Study, very few I’ve asked understand it. Kodak offers us an enormous gem; let’s take advantage of their gift! The study pointed out the huge advantage of a relatively conservative price increase in businesses where overhead is high. Certainly dentistry qualifies! Although there are still practices here and there with overhead at or below 50%, they are the rare exception, certainly not the norm. In fact, overhead as a percentage of gross continues to rise, with ever-increasing cost of staff, materials, lab services, facility, etc. It’s not at all uncommon to have a dental practice with overhead at 65% to 70%. In fact, there are many whose costs have risen well beyond, and would welcome the day if their overhead dropped back down to 70%. Whether you find yourself in the 60% to 75% range or beyond, this study applies to you. The higher your overhead, the more profound an effect you’ll get from applying this information. 

A modest increase in fees can dramatically improve the doctor’s/owner’s bottom line. Look at a couple of examples: Dr. Johnson’s practice has an overhead of 70%. His gross annual collections equal $500,000. Since Dr. Johnson’s net profit before taxes is 30%, his net is $150,000. Suppose he were to take a modest fee increase of 10%. Although there will likely be little if any negative effects on case acceptance from such an increase, the effect on his bottom line is enormous. No overhead increase. No additional costs. Simply an increase in gross collections of $50,000 (10% of 500,000) to his pocket! If he were to increase 15%, the increase, again directly to his bottom line, is $75,000! In effect, with no other changes, he’s increased his pay by 50%. Would a 15% increase potentially decrease case acceptance? Would it cause some patients to leave the practice altogether? Possibly. Unlikely, however, that an increase of 10% to 15% will have significant negative ramifications. 
Let’s play Devil’s advocate. Suppose that the increase was high enough to have a considerable negative impact on case acceptance or patient retention. Suppose case acceptance dropped by 10%. At the old fees, this would have resulted in a drop to $450,000. However, at the 15% increase, the result would still be an increase to $517,500. Not only would the increase of $17,500 be pure increase in net income for the doctor, the increase would likely be significantly more than that. The 10% less treatment results in less variable costs required—lab, dental supplies, wear and tear on equipment, etc. He’d also have an extra afternoon off each week! Real world? Many practices are so busy just trying to keep up with patient demand that they are booked weeks in advance. Many are solid for months. The result of a 15% increase, assuming 10% attrition, would be a pure $75,000 increase. Why? Because in most practices today a “busy-ness problem” means that we are not serving our patients in a timely manner. We have a backlog of weeks or months. That might drop by a couple weeks, if that. 
Let’s look at another example. Dr. Williams’ practice has a bit higher overhead, at 80%. He too has gross annual collections of $500,000. Because of his higher overhead, his net is only $100,000. If he were to take a modest 10% increase in fees, the resulting increase in personal net would be $50,000 or 50%! A 15% increase would result in $75,000 net increase, or 75%! Note: Of course no one can predict exactly how an increase will affect any particular practice. The overall results should be monitored closely. The fact is, you’ll probably not see much if any resistance to such a modest increase in fees. If you’re thinking of a 15% increase, but want to be extra careful about the potential negative ramifications, you could increase 7.5% today, and if all goes well, repeat the same level increase in 6 months! Of course if you do the math, this would result in a slightly higher than 15% increase, but that’s fine too! 
Remember to continually monitor and adjust (up) your fees at least once every year. You would also be well advised to keep just a couple fees down closer to the average of your local colleagues. The more visible, sensitive fees are new patient exam (and x-ray) and prophy (and re-exam). If you keep these fees relatively average, other hygiene services (whitening, periodontal phase 1 therapy, etc) can be raised with the rest of the office fees. 
You hopefully now have a huge incentive to consider raising your fees. But how do dentists go about figuring exactly how much they should increase? Pretending to be someone we’re not is perhaps the most common yet least rational way we determine fees, whereby our staff calls five other offices, pretending to be a patient in need of a particular service. “Hello, Dr. Smith’s office? I recently moved here and my dentist back home told me I need a couple of, er, uh, I think he said ‘caps’? I was wondering what, uh, caps might cost?” This approach makes absolutely no sense, but it’s done routinely. We’re afraid that if we are charging much less than our colleagues, we’re missing out on deserved income. We’re also concerned that we wouldn’t want to price ourselves above or beyond the local market, either. Why? Fear. Plain and simple. At least if you’re going to use your local colleagues as a guide, you should do it scientifically, not with a random miniscule sample. 

PROFESSIONAL SERVICES OFFERING STATISTICAL ANALYSIS 
There are professional services offering a scientific analysis not only of your local colleagues’ fees, but many other useful factors as well. One such service is Dr.
Charles Blair’s profitability/revenue enhancement service [(704) 424-9780]. They will show you a breakdown, fee by fee, of how your fees compare with those of your local colleagues, by percentile. Some of the easiest profitable corrections you can make are to search out and raise those fees that are below normal for your own practice, ie, if your overall fees fall between the 80th and 83rd percentile, you might run across one service you’re performing at the 70th percentile. If so, even if you weren’t to increase your fees overall, a simple “correction” of this fee (up to the 83rd percentile) is absolutely in order. 

There are many other advantages to using such a professional service. You may be performing excellent crown and bridge services, but coming up short when it comes to the average number of units of buildups, for example. Perhaps you are performing the buildups, but weren’t anticipating them during treatment planning—and thus not charging for them. This is but one of many items a professional analysis can uncover to help your bottom-line profits.  

EXCELLENT STATISTICAL ANALYSIS VERSUS PATIENTS’ PERCEIVED VALUE 
What’s the difference be­tween statistical analysis and patients’ perception of value? It could be dramatic enough to send one or more kids to college, and then some! A professional analysis is likely a great start. It will certainly allow you to make many corrections, maximize your patients’ insurance benefits based upon proper coding of services (there have been many changes), and give you an accurate assessment of where your fees stand in relation to your colleagues. The trouble with all of the above is that neither the insurance companies nor your local colleagues should be setting your fees! In fact, you may be in a situation where your patients perceive a far higher value than you’re charging for! 

Did you ever wonder just how much your patients would be willing to pay, and still feel that they’d received great value dollar for dollar? If you are currently charging $800 for an all-porcelain crown, has it crossed your mind that patients might happily pay $900? $1,000? More? In the business world, many industries would look at our “high” overhead and kill for similar levels of profit. By comparison, we sweat relatively little for pretty darned good margin. If you look at grocery chains, they live and die by a single percentage point change. Whether they are profitable or go under could be determined by such a very slight upward shift in overhead or downward shift in sales. Other businesses employ methods to let their market determine the maximum they can charge and still have happy, returning, referring customers. And so, too, should we. 

Businesses use price point testing to allow the market to tell them just what to charge for overall optimal results. 

PRICE POINTS—WHAT ARE THEY? 
The next time you attend the theater, have some fun (or not, depending upon what you paid). Before they dim the lights and raise the curtain, take a poll of everyone in your row or section. Find out what each one paid for their seats. Same theater, same production, same seats, on the same night, yet you’ll likely find a variety of answers to your query! In fact, the dramatic swing in price paid may shock you. Though I wasn’t taking a survey, this actually happened to me years ago at the theater! It was a good wake-up call for me. It made me realize that it’s as much the rule as an exception, that five different people could pay five different prices for the same goods or services—with no differences other than the price. 

Price points are the various levels at which increases in fees result in a measurable decrease in sales, ie, a substantial enough decrease in sales to negate the increased profits gained by the higher pricing. Of course, there are many factors entering into the long-term profitability picture. How many are left in your customer base? What level of attrition could be expected just from customers’ deaths and geographic moves? However, until you’ve examined price points, you haven’t allowed your market to speak to you. You’ve not given them the chance to tell you how much your goods or services are worth to them. 

PRICE POINT TESTING IN DENTAL PRACTICE: ASK YOUR MARKET! 
At my “Maximum Profit Ultimate Cosmetic Practice-Building Seminar” in Las Vegas, I introduced a profitability exercise brand new to dentistry: price point testing, which allows your market to clearly tell you what your services are worth. Start with one of your highest fee services responsible for the largest percentage of your gross collections. Take, for example, the all-porcelain crown. Whatever your fee, I’ll suggest that you compare the results of offering this crown at $200 and $400 more than your current fee. If you are presently charging $800, then that’s your “A” fee. Your “B” fee will be $1,000, and your “C” fee $1,200. The test will be to determine your market’s (patients’) response to various fee levels. Note: direct response marketers have said for years that fees ending in “7” test better than any other number. Maybe it just sounds less arbitrary! Whatever the reason, I’d take the $800 fee and make it $797 and so on. The test must eliminate as many variables as possible. For instance, if you were to test price “A” all this month, price “B” next month, and price “C” the following month, market flux and overall shifts in the economy could impact the results without your knowing it. You might also experience variance in times of the year or seasons. 

What about day to day? What if we just did one fee each day? Your personal mood/attitude on a particular day could potentially affect case acceptance, and thus impact the results. Dif­ferences in case size would also play an obvious factor in whether or not patients moved quickly into treatment. Using one fee for a single crown recommendation versus another fee for someone needing ten units is by no means a useful test. 
There will still be a few variables you’ll never control. However, for the most reasonably accurate price point testing, test only those patients for whom you’ve recommended a single unit all-porcelain crown. Continue to revolve the offered fee in an “A-B-C” order. For those patients receiving a single unit all-porcelain crown recommendation, the first is quoted fee “A,” the second, fee “B,” the third fee “C.” Patient number four gets fee “A,” and so on. Of course, be certain to record the recommended fee in the chart and computer treatment plan. The only exception would be a husband and wife both requiring the same exact service. They should be quoted the same fee!

Starting Monday morning, put a couple of 3×5 cards into your pocket, and carry them with you for the duration of the test. Divide each card into three columns and label the top of the columns with the price point tests: “$800,” “$1,000,” and “1,200.” Make a mark for each patient you treat in the appropriate column. The test is simple, but the potential upside for your profitability is enormous. Continue your test until you’ve offered at least 20 of each fee. Of course, the larger your sample the more statistically significant your results. Wait at least 2 weeks following the fee rotation test to evaluate the results. Any patient having scheduled the crown by the 2 weeks posttest date is considered to have been a positive result.

Now run the numbers. Imagine the following re­sults: $800 crowns: 15 of 20 scheduled; $1,000 crowns: 12 of 20 scheduled; $1,200 crowns: 10 of 20 scheduled. In each case you’ve brought in $12,000 worth of treatment. Your overhead will decrease as the number of units performed decreases, in effect increasing your
net profit in this particular scenario. Also bear in mind that you don’t necessarily end up with open chair time just because some of these patients have not yet scheduled. Especially in those practices in which patients must wait for weeks or longer to see the doctor, you’ll likely still be busy from opening to close. The results in that type of practice might be a slightly shorter wait (1 week instead of 2, for example). However, the impact on the bottom line could be huge. 
Assuming that you’ve found that the test has helped you set higher fees that patients are still willing to accept, roll out the test for your other higher-end services in a similar manner. Crown and bridge and endo would be a couple of the obvious places to start. However, if you perform a high percentage of operative, consider doing the exact same type of testing for your filling fees as well.  

CONCLUSION 
Dentistry is an incredible profession offering increasingly wonderful services to our patients. Yet it’s far more the norm than not to hear older dentists wondering what they’ll do about retirement. The small number of dentists able to retire to anywhere near the lifestyle they’ve previously enjoyed is unacceptable and something we have the ability to change. Sensitivity to patients’ needs, especially those less fortunate, is certainly a consideration. However, you will find yourself far more able to help those people deserving of your pro bono assistance once you’ve allowed your market to tell you what they perceive to be the true value of your services. 

Reexamine the ramifications of the Kodak study, and realize the incredible impact even modest fee increases could have on your bottom line. It’s my sincere wish that you find significant hidden profits using this price point testing technique. It would be greatly appreciated if you were to e-mail me an overview of the results of your testing and the resultant changes made in your practice. It is the sharing of information from which “gems” such as these are born. 

Dr. Orent is a management consultant and practicing dentist, and a founding member of the American Academy of Cosmetic Dentistry, for which he has served as president of the New England Chapter. Dr. Orent lectures internationally with “1000 Gems Seminars,” has been a guest lecturer at Tufts University School of Dental Medicine, University of Nevada, Las Vegas, Brigham Young University, Illinois State University, New York University, New Jersey Dental School, and is a member of the faculty at Boston University Graduate School of Dentistry. He has lectured to dentists in four countries and at state and national meetings in 46 of the 50 United States, and has authored four books and numerous articles on aesthetic dentistry, practice management, TMJ, and extreme customer service. He practices aesthetic dentistry in Framingham, Mass.

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