Setting Your Fees in Dentistry – Dr. Joseph

Setting Your Fees in Dentistry – Dr. Joseph Salkind

  • 24 Nov 2016
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wk5_3_services_pricing_methodsWhen I started my practice I had no idea how to set my fees. After 20 years how to price dental fees was still a mystery. I could never get an answer that satisfied me. During my MBA program, I finally came up with an acceptable solution. I learned the way top companies set prices for goods and services. There are three methods: Cost-based pricing methods, Competition-based pricing methods, and Demand-based pricing methods.

1.  Cost-based pricing methods: The starting point for price is what the services or goods cost to produce, and then add a profit margin.
2.  Competition-based pricing methods: The starting point for price is a competitor’s price also known as “Going rate pricing”
3.  Demand-based pricing methods: There are 4 methods: Value, Low price, Benefits, Quality and Give and Get. Value pricing target buyers looking for discounts because people have a tendency to focus on the left-most digits. In this price, $120.99, the”.99” is perceived as discounted pricing. In Benefits Pricing, the customer perceives a benefit from a service worthy of the cost. Quality pricing is similar except the perceived service is of high quality that justifies a high price. Usually they target the high income buyer segment. Give-get pricing involves bundling goods and services with one price. The advantage of bundled pricing is that it obscures the mental link between the price and the benefits of individual goods and services.

Profitability: Are you making money or losing money?

Dentists need to know which services, at present fees, are profitable or not. Determining profitability per procedure can be calculated using the Contribution Margin (CM) of the service. CM is the gross profit per service not including fixed costs. Fixed costs never change and cannot be attributed to every product or service effectively so it is eliminated. CM is the cost to produce the service subtracted from the fee or price. What you are left with is a monetary amount that contributes to fixed costs and profit. The cost to produce a service is the Variable Cost (VC). Here is a simple formula for Contribution Margin. CM = Fee for service – VC of the service

VC is calculated by adding the supplies used for the service with the total time of the service multiplied by the pay rate of each employee involved. The result is a positive or negative number. The sum of all CM minus total fixed costs are included like rent, utilities etc. would be actual profit.

Every dental office does more of some procedures than others. We need to know the procedures that contribute the most and the least to the offices’ profitability. Changing the fee of a specific service has a different effect on profitability. These are examples with nonrealistic numbers, but it makes it easy and useful to demonstrate these concepts.

Example 1:  150 fillings were completed this month with a CM of $300. Your total CM for that service is 150*$300= $45,000 per month. The total CM sum of all services is $200,000. The percentage of fillings CM is $45,000/$200,000 or 22.5% of your total CM! Changing that fee would have a drastic effect on your businesses profits!

Example 2:   Your CM for a periodontal scaling is the fee of $300 minus (Hygienist $35/hr. *1hr.)+$40 in supplies+ $100 of Dentist time resulting in a CM of $300- $175= $125.00. The office does 30 per month. Thus, 30 * $125= $3750. Using the previous example $3,750/$200,000= 1.88% of your total CM.
Let’s increase the fee 10%: $330-$175= $155 *30= CM $4650/$200,900= 2.3%

Now, Let’s reduce the fee in Example 1 by 10%. Thus, 150*$270= CM of $40500 or $4500 loss of gross profit! A procedure’s CM based upon individual CM and # of procedures done! Now what if CM was a negative number? Then stop doing that service or change the fee making the CM positive! Here is a link to a spreadsheet to calculate you CM for each procedure and the total CM on a monthly basis. These concepts will give you better insight into how to price your fees and their effect on profit..

Good Luck! LINK

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