As business owners, we have a pretty good idea as to what we’re paying for business expenses like consumables, salaries, leases, rent, etc.
Let’s review the two variables you’ll want to understand before digging further:
- Cost to Acquire Customers (patients) – CAC
- The ability to monetize those patients & Lifetime Value (LTV) of each patient
The CAC is your entire cost of marketing (include salaries if you have a designated marketing person) divided by the number of new patients generated. For most offices this will range from $150 to $300 per patient, and as a rule of thumb, you’ll want to recover the CAC cost in year one.
For most dental offices, CAC recovery will naturally occur in year one as new patient spend averages $700-$1250 or more. Calculate your new patient average spend with your overhead percentage (industry average 60-75%) to determine your net per new patient. You’ll likely find that you’ve covered the CAC cost with a net per new patient at roughly $250-300.
Calculating LTV is a bit more complicated. If you ask 3 consultants and 3 dentists, you’ll likely receive 6 different methods of calculation and 6 different answers. What is consistent is that the average dental patient stays with a practice for 7-10 years and spends an average of $653 per year (ADA average). This means that a new patient will generate at least $4500 in revenue (excluding referrals) in their lifetime with a practice. You can clearly see that after year 1, what the patient pays is profit back to the practice. Dentistry is all about recurring revenue, and acquiring quality new patients is worth the initial investment.
When a practice’s business model fails, its CAC (cost to acquire customers) equals or exceeds its LTV (ability to monetize those patients). In other words, the new patient experience doesn’t result in return visits and low satisfaction/patient churn is way too high.
In successful practices the Lifetime Value is significantly higher than the Cost to Acquire, and that is the key metric to keep top of mind. If your LTV is high, through minimal attrition and high procedure acceptance and referral rates, a $300-500 cost of acquisition makes solid business sense.
All too often dental practices will take their most successful campaign, sometimes from 10 years prior, and use this is as their CAC benchmark. They’ll then jump from campaign to campaign, and medium to medium, in search of similar results, losing time, momentum, repetition, and money.
Times have changed and consumers are bombarded with multiple messages from various mediums. Marketing discipline and execution are critical to any practice’s current and future success and understanding the relationship between your specific CAC and LTV are critical components for an effective and successful long-term marketing planning process.
It’s also imperative to have the right internal marketing processes in place to effectively monetize patients’ LTV and to be constantly looking to improve – you’ll then be in a good position to determine what you need to invest in new patient acquisition.
Since 1993, Patient News has been assisting dentists with both effective retention (increasing LTV) and acquisition (lowering CAC) strategies. Give us a call to discuss both. We’ve developed sophisticated financial modeling tools which can assist in determining future revenue growth and we would love to share these with you along with numerous other reports.