“What gets measured gets improved.”
– Peter Drucker
I love this statement by legendary management consultant Peter Drucker. I guess why I enjoy it so much is because I have felt the pain of getting it wrong. I have been that entrepreneur who invested dollar after dollar without knowing if I was getting a return from it.
The message here is you need to track EVERYTHING. That may seem obvious to you here and now, but you would be surprised how much cash flow is leaking out of your business. The worst part is, most doctors don’t even know how much money is being lost or how many blown opportunities they have had. I follow Peter Drucker’s advice to measure and improve everything I can.
When I started, I found out that I was getting lost in the details and didn’t really know what to do with the numbers. Eventually, I learned to start simple and stick to the basics. I would like you to learn from my mistakes. One of my favorite lines that my wife shared with me is, a wise person learns from their mistakes while a genius learns from the mistakes of others. I know you are a genius and can learn from my mistakes.
Let’s start off with the basics and keep it simple. You need to know some basic measurements to implement effective ROI-based marketing.
ROI (TRUE ROI) – Return on Investment – The net amount of profit divided by the cost of your investment times 100 (Profit/Cost x 100). This is expressed as a percentage (%).
ROA – Return on Activity – The gross revenue generated minus the applicable gross marketing expenses, divided by the applicable gross marketing expenses times 100 (Revenue-gross marketing expenses/gross marketing expenses x100). This is expressed as a percentage (%).
NOTE: Both ROI and ROA require you to calculate either the net profit or the revenue directly generated from a particular marketing campaign. This is time-consuming and cumbersome to complete and may not be worth the effort. Instead, we use a Simplified ROA/ROI calculation which will be easy to calculate and will give you the information you require to determine those marketing campaigns which are working and those which are not.
Simplified ROA/ROI: The average revenue generated by the campaign divided by the applicable gross-marketing expenses times 100 (Average Revenue/Related marketing expenses x 100) ***The key difference here is the manner in which average revenue is calculated.
Revenue Per New Patient – The total adjusted revenue for your office over a 12 month period (or period of time) divided by the total number of new patients over that same time period times 100 (Total revenue 12 months/Total NP’s same 12 months x 100)
LTV – Lifetime Value – The lifetime value of a customer and the total amount of revenue a client brings over the length of the relationship. Revenue Per New Patient x Period of retention (a 5, 10, 15, or 20 year period, depending on how confident you are that you retain your patients for the period of time chosen). For demonstration and simplicity, we’ll assume Revenue Per New Patient is $2000 and the retention period is five years.
CPL – Cost Per Lead – The average cost to generate a qualified lead or what it costs to generate a phone call.
CAC – Client Acquisition Cost – The average investment required to attract each new client. In other words, this is what it costs to get a patient in the chair. The difference between CPL and CAC is predominantly influenced by your call-conversion rate.
Here’s an example of how these measurements are used. Assume you spent $50,000 in advertising last year which generated 166 new qualified leads and you closed 50 new clients for your dental business. For each client you have, assume the average client stays with you for approximately five years and spends an average of $2000 per year in treatment plans and maintenance.
These are the numbers you need to create a foundation for ROI-based marketing.
CPL = $301.20/lead ($50,000 ad spend/166 new leads)
CAC = $1000/client ($50,000 ad spend/50 new clients)
LTV = $10,000/client ($2000 client spend/year x 5 years)
ROA = 900% ([$10,000 LTV – $1000 CAC]/$1000 CAC)
These figures are oversimplified and just used to illustrate the concept. One may argue that the lifetime value above is incorrect because most patients stay up to 20 years or most patients spend less than $500-$1000 in a year. In this case, the LTV would be between $10K-$20K per patient. The bottom line is that your patients are valuable and tracking these figures will drastically improve how you are able to manage your dental practice. Remember at the beginning when I discussed John Wanamaker’s quote about knowing which 50% of his advertising is being wasted?
Once you really start paying attention to the return you are getting on your marketing investments, you will start to notice a few trends. The most obvious trend will be what is working well and what isn’t, which will lead you to two very important decisions:
1.In which marketing strategies do I continue to invest?
2.Which modalities do I need to STOP?
In my experience, answering the second question and deciding which marketing modalities I need to stop has saved me more trouble than I can express. When you consider any of the lead-generation strategies available to you, if you are seeing even a slightly positive return, an increase is still an increase. Warren Buffet said the first rule of investing is not to lose money. The same applies here. The more you can mitigate losing money when you are investing in marketing strategies, the sooner your gains will take over. Then you will increase in confidence in what you are doing.
Knowing when to STOP investing in marketing that has no ROI requires knowing your numbers and having patience.