Practice Management: Pruning Your Money Tree
- Posted on: Nov 10 2017
Improve Your Bottom Line By Identifying and Eliminating Poorly Performing Products and Services
by Cheryl Whitman
As any good gardener knows, in order to have a healthy tree that bears plentiful, quality fruit, the tree must be regularly pruned. This holds true for businesses as well. In order to maintain a healthy bottom line, practice owners must be willing to cut away the deadwood in their facilities—those products and services that simply don’t carry their weight. Offerings that are not selling and those that contribute a below average return on investment (ROI) can damage cash flow—and your business overall.
Taking Stock of Retail
To identify products that may need pruning, review your sales and inventory reports at least twice a year to determine which items are selling through and which are not. In addition to looking at sales volume and time on shelf, consider the profit margin of each line. Ideally your retail products should be selling through within four months, and brand name products should sell at twice your cost. (In some cases, practices may choose to continue a “loss leader” product—one that sells at a below average profit margin—if the product or line regularly brings patients in the door for additional sales or treatment bookings.) Products that are not selling should be discontinued to make room for new offerings. Once you’ve made this decision, you can get rid of your slow sellers by packaging the products with services, offering a buy-one-get-one-free promotion, or creating a sales shelf to clear poorly performing inventory.
Evaluating Your Service Menu
While retail is a valuable revenue source, it is your in-office services that contribute the majority of your income. Regularly reviewing your service menu allows you to focus your marketing efforts on the most popular—and profitable—services. Removing poor performers makes room for new, in-demand treatments.
The following steps will help you evaluate your current service offerings.
Step One: Get a snapshot of your current business by reviewing at least three months of data. Identify which services had the highest and lowest volume of bookings. To make sure you are getting a clear picture, note any sales or special promotions offered during this time period and take that into consideration as you review your numbers.
Step Two: Calculate the gross revenue of each service. This is the total fee you collect from the patient, including any sales tax. This shows you which treatments contribute most to your bottom line.
Step Three: Tally the costs associated with each service. This includes both direct costs, such as labor, equipment, and consumables, as well as indirect costs, such as overhead and marketing.
At this point in the evaluation process, you should have a list of every service you offer and a solid knowledge of both the gross revenue and the cost of providing that service. Now you can create a profitability scale that ranks each service by its profitability from highest (your “golden apples”) to lowest.
Keep in mind that not every service can be a golden apple. Lower-margin treatments may bring a significant volume of patients to the practice—patients who then purchase retail products as well as other, more profitable services from time to time. However, you do not want a menu filled with low-margin service offerings.
Now take some time to analyze those golden apple services. Are they all in one category (e.g., injectables, laser resurfacing or body contouring)? Are they unique offerings or are they services that your competitors also offer? Are they relatively new additions to your menu or are they tried and true treatments? This information will allow you to develop new strategies to grow your revenue.
For example, once you know which procedures bring in the most patients and offer the largest net profit, you can focus on growing demand for these services. Look for new or niche demographics in your area who may be interested in the treatments and create marketing efforts to reach them. You may also consider a special promotion that packages a high-margin service with a popular, lowermargin treatment to engage more of your existing patient base.
By identifying the qualities of these golden apple services, you are also better prepared to recognize new treatment offerings that will appeal to your patient base and offer similar benefits to your practice.
Finally, look at the bottom tier of your profitability scale. If a procedure is relatively popular but not profitable, it may be time to raise the price or package it with higher-margin services. Get together with your staff to brainstorm profitability improvement ideas and act accordingly.
If you identify bottom-tier services that cannot be made more profitable, it is time to carefully consider whether the treatment should be eliminated. Before you eliminate a service, ask yourself two questions:
- Is this procedure a loss leader – i.e., does it bring people through the door who then spend money on other, more profitable products and services?
- Is this a service that I have to offer in order to remain competitive in this marketplace?
If the answer to both questions is no, eliminate the deadwood.
Planting New Trees
Once you have disposed of under-performing products and services, improved the profitability of marginally lucrative services, and expanded the sales of your golden apples, it’s time to plant new revenue trees.
Keep your finger on the pulse of the industry by attending conferences, reading the literature, and speaking with colleagues and sales reps. This allows you to recognize growing trends and identify new procedures that will complement your current menu offerings.
All of your trees also need regular care in the form of targeted advertising and marketing efforts. Promote your service menu and retail products on the internet, through social and local media, and display marketing collateral such as brochures and shelf talkers throughout your facility.
In order to maintain the financial health of your practice, you should plan to review your product and service offerings every six months.
Image copyright Getty Images
Cheryl Whitman is the CEO of aesthetic business consulting firm Beautiful Forever and author of
Beautifully Profitable/Forever Profitable. Contact her at [email protected].
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