Measuring Management
Inside Dental Technology delivers updates on digital workflows, materials, lab techniques, and innovation in dental technology through expert articles and videos.
May 1, 2012
Volume 3, Issue 5, May 2012
Page(s):
“We have all heard that one before”—and—“What gets measured gets done.” I agree with both statements. Laboratory owners dutifully track all kinds of data. But what if we are not measuring the right things? Or, what if we are not measuring them in real time? Are they still valid and useful?
At the end of each year, quarter, and month, we report our revenue, track our expenses, and likely run an i come or profit and loss (P&L) statement that tells us how we did, but not how we are doing. If what we did is our sole or primary metric, then we may find ourselves at the mercy of the economy and the laws of macro-supply and demand. When the economy tanks—cosmetic dentistry takes a hit, implant demand falls off, and/or price sensitivity takes market share, and we lament how bad things are. The logic is that when the economy comes back, so shall we. It does not have to be this way. The goal should not be to track how many units were manufactured last month or last week, but rather, what can be done to increase the number of units my laboratory is going to do? It is still important to report results in a timely fashion, but we also want to focus metrics on those strategies and tactics that can help manage and grow the business, not simply report on it.
Retention, Percentage, Conversion
Retention of existing clients, percentage of their total laboratory bill, and conversion of prospects into new clients are what should be chosen to focus on in order to really manage the business and not just report on it. It makes for a nice acronym: CPR. Conversion, Percentage, and Retention—but in reverse order of importance.
Laboratory owners often complain that they need more new clients. If they just had more doctors doing business with them, they would be in terrific shape. When the author hears that complaint, he immediately asks the owner what his or her retention rate is of their current clients and what percentage of the laboratory expense are these doctors doing with them? Rarely does one ever know. If you were successful in getting one new doctor every month, but lost two during the same time, you would end the year with less revenue. If your doctors average $1,000 per month (of their $5,000 laboratory bill), that might only represent 20% of their total. Both of these opportunities are more important to measure, monitor, and manage than how many new clients or what we did at the end of the month. These are the metrics that impact those numbers in real time.
A $1 million laboratory with 90% retention loses $100,000 per year. If you track that, it means that you will need five new clients averaging $1,667 per month to replace the dentists lost during the year just to break even. Another approach would be to make up for the loss in percentage of chair that you command. The average dentist uses 3.1 dental laboratories and has an average laboratory expense of 8% on an approximate annual $750,000 in gross revenue, or $60,000. That means the average active client using your laboratory should spend 33% of their $60,000 laboratory bill with you, which would be $20,000 annually or $1,667 per month. If we could increase that expenditure by 10% penetration for each of the remaining doctors ($1,834 per month), we could make up the same loss in retention with better percentage of chair.
Imagine what would happen if we had 100% retention and improved our percentage of chair? We would grow our business without adding any new clients. Existing clients who stay retained longer are also more likely to refer their friends to work with us. It is the dental laboratory trifecta—conversion, percentage, and retention. This is not to suggest “no new clients” as a business strategy, but rather as an academic point to emphasize the importance of this business trifecta.
Client Retention
This is not the place to discuss operational quality, consistency, and communication constructs. Nor will we talk about being on time every time, or price-point management. Those should be givens. Rather, our focus here should be what our clients are doing with us right now. Design a report that shows the current monthly revenue per client compared to the previous 3 months’ rolling average. This highlights for you who is trending up or down, but not why. In the absence of the knowledge of a vacation or other closed-office reasons, a 33% to 50% reduction in an otherwise steady monthly average account would indicate something may be wrong. Calling to find out what is wrong opens the door to solving a problem before the account goes to zero. Similarly, calling accounts who are up significantly and celebrating with them may encourage them to keep trending in that direction. Like you, dentists appreciate being noticed when they are spending more money with someone. Make them feel special and an important part of your success.
One way to make your best accounts feel the love is through loyalty programs. Do the math first and figure out what percentage of sales you can afford to spend on these accounts. If you have $1 million in revenue and have priced in 1% for loyalty, that translates to $10,000 annually. It does not mean that every client gets the same gift or award, or even the same percentage back in kind. We should decide to disproportionally reward our top 20% of clients who generate 80% of our revenue using the whole $10,000. Reward systems are not designed to be fair rebates to all; instead, they are designed as retention programs for your best customers.
Bill Percentage
Another report that will help you cross-sell your clients into other products and services is a “revenue/by doctor/per product” report. Business studies show it is easier and less expensive to sell more and deeper to an existing client than to acquire a new one. Divide your products into categories you provide (could be anterior, posterior, implants, and removable). Analyze who and what your client purchases, and then strategically go after the cross-selling opportunities that become apparent. If a client values you for your anterior work, you may be able to make inroads into their posterior business, or vice versa (removable vs fixed, single units vs complex cases, implants only vs everything else). One of the most successful business strategies in play today is selling broader to existing clients. Banks, grocery stores, restaurants, and others do this every day because it works. Our clients are also consumers and will respond to this initiative.
Client Conversion
Once you are measuring, monitoring, and managing the more important business components above, feel free to ask for more new clients. In every study the author has read for dental laboratory business development, the number one source of new clients has always been referrals from existing customers. So, focus on that and drain it dry before you do anything else. Ask your best and favorite clients to refer you. Practice having the conversation with them by drafting a script and role-playing with your team. Your clients will be flattered if you ask them in the right way. Try to include the following phrases, but put them in your own words:
- Can I ask your help with something?
- We are not trying to be the largest laboratory in any town in this state. In fact, if every doctor wanted to send their work to us, we couldn’t possibly do that much.
- I have really enjoyed our relationship and doing work for someone like you.
- If you should happen to think of someone who would be right for our laboratory, could you mention our name and recommend us?
Using Conversion, Percentage, and Retention (CPR) in the right order and measuring the right things builds a framework for your strategic business plan that will prevent you and your dental laboratory business from needing the other kind of CPR.
About the Author
Mark T. Murphy, DDS, is the vice president of sales, clinical education, and mergers and acquisitions for Microdental-DTI.
