When you work to increase sales of a certain treatment, service or product, it’s important to consider the marginal cost.
Marginal cost is the amount of money, time, etc. it takes for you to produce one more of the service or product. This is separate from the fixed cost, which is the same whether you produce one item or one million items.
In a basic example, the marginal cost of a car is high and the marginal cost of a software installation is low.
Oftentimes, though, we don’t consider marginal cost effectively when making business decisions. We look at just revenue and think a $1,000 root canal is more valuable to our practice than selling a $50 in-home whitening kit.
Let’s look at Dr. Deedee Ess’s office to see how this plays out.
Sure, a root canal brings in a good chunk of revenue. But it also takes a good chunk of Dr. Ess’s time, as well as disposables and wear and tear on equipment. When everything is factored in, the marginal cost could be upwards of $800. That’s at least 80% of the revenue.
The whitening kit brings in a lot less revenue, but the marginal cost is also a lot lower. Dr. Ess has a deal with a vendor where she can purchase the whitening kit for $20. The vendor provides promotional material and most sales are made during the hygienist’s typical patient conversation. So there’s not a lot of extra work involved. Here, the cost is only 40% of the revenue.
We also need to look at fixed costs here, and we’ll say the fixed costs are the same. She’s able to provide both services because she invested in dental school and operates a dental office. Those costs are the same whether she provides one treatment or many.
Let’s say for every one root canal Dr. Ess does, 20 patients want whitening kits. This brings the dollar values in line.
She does one root canal with a revenue of $1,000 and a marginal cost of $800. That brings in $200 in profit for the office. She also sells 20 whitening kits with a revenue of $1,000 and a marginal cost of $400. That brings in $600 in profit.
By looking at the marginal cost, we see that the whitening kits are far more profitable for Dr. Ess.