Everyone knows that if you cut prices and don’t increase sales, your profit will go down. That’s basic math.
But if you stop to examine how much you need to increase sales to allow for even a small price cut, it starts to get a bit scary.
Kodak—the old film and camera company—did such a study decades ago. And it applies nicely to dentistry.
The study assumes a company has a 25% profit margin. This is roughly the margin for a dentist-owned practice when you combine the dentist salary and profit.
Here’s what Kodak found: A small decrease in prices needs to be compensated by a much larger increase in sales. A 5% increase in sales won’t make up for a 5% price cut—not even close.
Here’s a basic breakdown:
- A 3% price cut needs to be offset by a 13.6% sales increase.
- A 5% price cut needs to be offset by a 25% sales increase.
- A 7.5% price cut needs to be offset by a 42.8% sales increase.
- A 10% price cut needs to be offset by a 67% sales increase.
- A 15% price cut needs to be offset by a 150% sales increase.
- A 20% price cut needs to be offset by a 400% sales increase.
We didn’t believe the numbers at first either. But we doubled checked Kodak’s math, and it checks out.
We’ll show our work, since we think that sort of thing could be interesting to Toothonomics readers.
Say your practice brings in a cool million annually. Your profit and salary is $250,000, or 25% of the million.
But then you—or more likely Big PPO—cuts your prices by 5%. So now that cool million is down to $950,000. Since expenses stayed the same, your salary and profit is down to $200,000.
Bam. A 5% price cut gives you a 20% pay cut.
Just like that.
And to keep your salary and profit at $250,000, you need to boost your revenue to $1,250,000. (Just to confirm the math with the new profit margin of 20%, $1,250,000 X 0.20 = $250,000)
But why does this all matter?
When Big PPO cuts your reimbursements by 5%, your suppliers and staff aren’t going to take a 5% cut. So who takes that cut? You do.
Next time Big PPO sends you a letter saying they’ll be making a 5% or 10% cut to your reimbursements, think twice before saying yes. Because a 5% cut in reimbursements means you’ll have to increase volume by 25% to avoid a huge pay loss. And a 10% cut means you’ll need to increase volume by 67%. Just like that.