As a supplement to the DVM360 Full Circle that I’m doing with Dr. Heidi Lobprise and Annie Mills at this year’s CVC, I’ve put together some thoughts on pricing veterinary dentistry; how you and your team can address everyone’s concerns about money and increase your client’s compliance to preventative dentistry.
In my experience, there are two major reasons why veterinary professionals aren’t fully supportive of preventative dentistry:
- They don’t believe the benefits outweigh the risks of anesthesia
- They don’t believe the benefits outweigh the costs.
Over the past few years, we’ve made a strong case for the health benefits of preventative dentistry and what we can do to significantly lower the risk of anesthesia. I’d now like to turn to the costs involved in delivering preventative dentistry and give you and your team a way for all of you to participate in pricing veterinary dentistry and lowering your patient’s dental bills.
Before we begin, here’s a refresher. Preventative dentistry isn’t just safer than wait-till-their-teeth-are-wiggling dentistry; it’s less costly to perform. Every minute that your hospital is open, it’s incurring costs: the costs of electricity, rent, payroll, heat, telephone service and so forth. Typically this is between 4-6 dollars per minute for a 2-3 doctor general practice. Think of it as a money slot attached to a clock. Every time the big hand swings past the 12, someone has to be there to put money into the machine. If you have one patient in the practice, then there’s one client to feed the meter, but bring in another patient and you have TWO clients to feed the meter. As we increase efficiency and the number of people and pets we help, we don’t have to rely on one client to shoulder as much of our fixed cost expense; we can spread it out over more individuals.
Pricing Veterinary Dentistry
There are many other considerations to dental service pricing than the fixed cost concerns mentioned above and we’ll talk about these at the CVC Full Circle Session, but for the purposes of this discussion, we’re going to hold onto the idea that increased efficiency and service volume means cost savings to the practice and, if you price correctly, can mean costs savings for your clients.
If you and your team are able to combine the team driven client education and safety protocols described by Dr. Lobprise and Annie Mills at this year’s CVC, then we’re ready for an exciting part of our preventative dental program: pricing veterinary dentistry for early-stage-dental disease that makes the service easy for you to recommend and ensures that your practice is sufficiently profitable. Here’s what you’re going to need:
• A copy of your practice’s annual profit and loss statement (must include 1 year’s worth of information)
• A realistic goal for the average time it will take you to complete a routine dental cleaning
• A realistic goal for the average number of patients that will have an anesthetic procedure during the time your practice team is working on anesthetic procedures
• The material costs of goods involved with each service
• The ‘percent production’ paid to any associates
• An excel spreadsheet
The Big Picture
As we put on our green visors and get down to our accounting work, let’s take some time to think about the big picture. Many practices ‘close down’ between 12-3pm to do anesthetic procedures (if you’re not one of these practices, it’s okay, you can check out this link to dental pricing for a dedicated surgery team). While only some of our team members are physically involved in this work, we are still paying the entire practice team that’s in the building and anyone else that’s on salary. So, when we think about the expenses that we are incurring between 12-3, we’re not just going to think about how much each procedure costs, we’re also going to think about how much the entire block of time is costing us.
If we close down our practice between 12 and 3; schedule only one, grade-1 dental cleaning; and charge 500 dollars for the cleaning; we lose money, because the practice has incurred 3 hours of operational expenses (average per minute costs of $4-6 dollars/min x 180 minutes= $720-$1080 of expense). Therefore any fee schedule that we produce for individual anesthetic procedures must be weighed against the total time we allocate for anesthetic procedures in general.
Pricing Veterinary Dentistry: Calculating Costs
Okay, ready for some pricing?
Our first stop is the profit and loss statement. I want you to plug your practice’s numbers into this formula to determine your total Fixed Costs:
Gross Revenue- Cost of Goods Sold- Net Profit –Combined salaries of producing associates- Depreciation- Amortization= Adjusted Fixed Costs.
Determine the cost of each minute you are open:
Adjusted Fixed Costs/ 51 weeks/# of hours you are open week/ 60= fixed cost per minute of open operation *
The formula for pricing is Price= Costs/ 1-Desired Margin (as a decimal). Many confuse the difference between margin and markup. Don’t be included in this group. Refer to the handout on our Halow Tassava Resources page that explains the distinction. For our purposes, we’re going to shoot for a cover-your-bases margin of 25% on our dentistry after any paid doctor production. Seem high? It may not be high enough! Most practices have reduced the prices of their exams, vaccines, spays/neuters, and flea/tick/and heartworm products well below what they need to be in order to be sufficiently profitable. Our preventative dentistry program is designed to improve pet lives and make up for the revenue lost in providing other lower-cost procedures.
Next, we’re going to figure out a target price for a grade-1 dentistry. Here is the formula:
((C x T) + I + (Tx0.07))/ (1-(M+P))
C= Adjusted Fixed Costs per minute. (You already figured that out above)
T= Time you believe it will take you to complete the procedure
I = Your inventory and laboratory costs for the procedure
M= 25% margin (shown as a decimal)
P= Your target doctor salary as a percentage of their production, shown as a decimal. Typically this is 20% (0.20), but some practices with higher costs related to the training and salaries that they invest in their support teams aim for 18% (0.18).
(T x 0.07)= The average procedure time multiplied by the cost per minute of the giveaways, discounts, and missed charges at a typical 3-doctor practice.
Let’s use an example to explain: Smiles Veterinary Clinic has an Adjusted Fixed Costs rate of $3 dollars/minute. Each grade-1 dentistry performed costs $21 dollars in inventory and laboratory expenses. Sally, their dental technician, can admit, induce, clean, chart, radiograph and recover each patient in 80 minutes total. Doctors are paid 20% on all dental sales. What is the total client cost of this procedure if we would like a 25% margin on price? If we block out 3 hours of anesthetic time, how much revenue must we generate in the time period to cover expenses and still keep a 25% margin?
((C x T) + I + (T x 0.07))/ (1-(M+P))
(($3 x 80) + $21 + (80 x $0.07))/ (1-(.25+.20))
($240 + $21 + $5.6)/ (1-.45)
For the sake of this discussion, let’s also determine how much revenue we have to generate in the 3 hours of time to cover our expenses and a healthy operational margin**, however when I account for costs in this formula I include any salaries paid to doctors irrespective of their production rate. This gives me an understanding of how much revenue I must produce in a give time period to pay everyone, cover additional expenses, and earn a healthy margin based on total expenses. In this example, Smiles Veterinary has a fixed cost rate of 4 dollars/minute including the associate salaries that I have to pay independent of production pay.
((C x T) + I + (Tx0.07))/ (1-(M+P))
(($4 x 180) + 0 + (T x 0.07))/ (1-0.25)***
$720.00 +0+ $12.6= $976.80
Efficiency = Lower Costs
Once you complete 2 dental cleanings, your profits significantly increase because the expense of running your facility and your target profitability has already been reached. You can keep your prices at $484.73 per cleaning and schedule an average of 2 cleanings per day or you and your team can work together to increase efficiency so that you are able to complete 4 dental cleanings in 3 hours. Because profit swells once you pass your break-even point for fixed expenses, if you increase efficiency, you can afford to lower prices to incentivize clients and to be responsive to their financial needs. Here’s how the numbers work out.
At 2 cleanings per day, your practice grosses $969.46 with total costs including salaries for doctors of $774.60 or 20% margin. Keep in mind that I am costing out the entire time we are in surgery, not the time that it takes to complete 2 procedures.
But if we lowered our price to $425, increased our efficiency, and booked an average of 3 ½ dentals, we could gross $1487.50 with total costs of $923.60 including production pay or 37.9% margin!****
Use Excel to help you organize the costs discussed above and to play with various scenarios of price and efficiency. Share the data with your team using an overhead projector. Allow them to contribute to various scenarios as a jump starter to a bigger discussion on the stuff that really matters: how to work together better, how to keep pets healthier and safe, and how to encourage clients to heed your recommendations for preventative dentistry.
Don’t Discount Your Way to Competitiveness!
In an era when outside competition is gaining market share using discount
strategies, an effort on our part to grow our businesses with improved team work, standard of care, and consideration to our clients’ financial needs is an effort of distinction; one that underscores our own understanding of our value and locks in the kind of discretionary effort from our team that makes us unmatched at what we do.
* Based on taking off for 6 federal holidays
** In business, it’s not enough to break even. All businesses must generate a certain percentage of profit above other lower risk investments. In our industry, adjusted net profit must exceed 12-16% before our efforts are considered financially worthwhile.
*** The amount of money needed for overall expenses and to provide a 25% margin on costs with respect to revenue.
**** Total cost of OR time + COGS+ Shrinkage +20% production= $923.60