How To Calculate A Patient’s Lifetime Value
Dental Patient Lifetime Value For Dummies
Earlier this week, Jeff Gladnick from Great Dental Websites and I were discussing a Dentaltown post covering the lifetime value of dental patients.
We are real killers at parties.
What our meeting of the minds lead us to was the Dental Patient Lifetime Value for Dummies Guide.
Here’s a scenario:
You and your significant other are about to go out for a romantic dinner. It’s been at least six months since you’ve had a night out without the kids. This date has been three weeks in the making and you really don’t want it to be spoiled by bad food. Where do you go? The new place in town? That diner Bill was talking about?
“If you are like the majority of us humans, statistics show that you are 60-70% more likely to go back to a place of business where you’ve spent money and enjoyed the experience.”
The biggest companies in the world like Coke, Pizza Hut, and Toyota have a deep understanding of this human behavior. They even measure it with what is called the lifetime value of their customers.
These companies are battling for domination in their market. Dog eat dog. Eat or be eaten. Live or die. Lifetime value is what they are all fighting over. They know that if they can get you to buy once, you will likely continue to. Why do you think Coke advertises with polar bears? Do polar bears make you thirsty? It’s all about putting an image in your mind to try and have you remember their brand when someone asks, “What would you like to drink?”.
The formula is fairly simple:
- Get top of mind. (Advertising)
- Get the sale. (Revenue)
- Don’t let go. (Internal Marketing)
What’s not so simple is applying this concept in dollar terms. But the big boys have a handle on all of it. Why should dental practices be any different?
Dental Patient Lifetime Value
Topics to cover:
- What is the lifetime value of a dental patient?
- How can you use the lifetime value of a dental patient?
- How often should you calculate the lifetime value of your dental patient?
- What goes into the calculation?
- A simple checklist and spreadsheet to calculate the lifetime value of your dental patients.
What is the Lifetime Value of a Dental Patient?
First things first. Let’s get this straight: Throw out any industry standard you’ve ever been told. The most common number thrown around is $10,000. It’s just absurd to think that you can average it down to some nice round number and then apply it to every dental practice, especially in today’s environment of everyone scrambling and offering deals to steal your patients.
So what is the lifetime value of a dental patient?
“To put it simply, it is the average amount of money each patient in your practice is worth to you.”
Let’s illustrate with a hypothetical in bare, simple terms:
- You have 1,000 patients. You will never gain another new patient and you will never lose a patient.
- You are going to stop doing dentistry in 10 years. You will not sell the practice at that time. You’ll just lock the doors.
- Each patient brings in $100 a year in revenue.
- Your costs to service each patient is $50 a year.
- You are going to make $50,000 a year and $500,000 over the next 10 years (1,000 patients x $50 profit x 10 years).
- This would mean your lifetime value of a patient is $500.
If this sounds confusing to you, be vigilant. This is why so many dentist’s ignore or screw up this calculation. If it were easy, you wouldn’t be reading this helpful post. But you can always reach out to the Tooth & Coin team to help you figure out this and other essential business numbers.
How can you use the lifetime value of a dental patient?
The biggest uses for this number are:
- Internal Marketing (Keeping Active Patients)
- External Marketing (Getting New Patients)
A lot of dental practices are lost when it comes to internal marketing. They try to make sure patients have a good experience, but they don’t really understand if their efforts are working or not. Of course, there are those months where it seems like patients are dropping like flies, but we are talking about specific measurability.
Using the change in lifetime value of a patient is a fantastic measure of your internal marketing:
- If you see it increase, you are doing a good job.
- If you see it decrease, you are doing something wrong (or a competitor is better at external marketing than you are at internal marketing).
- If it stays flat, you could be doing something better.
The change in your dental patient lifetime value is an indicator of your internal marketing effectiveness.
External Marketing (marketing to new patients)
Knowing this number can dramatically change your perspective on marketing. It should be pretty apparent that if each patient is worth $500, you can spend up to $500 to acquire a new patient and break-even.
“If you increase the lifetime value of a patient, you can spend more money to profitably acquire more patients. And if you know your dental patient lifetime value, you know how to profitably obtain new patients.”
How Often Should You Calculate the Lifetime Value of Your Dental Patient?
It’s incredibly important to reiterate that the lifetime value of a patient can dramatically change over time. This is not a motionless number that continues on forever. You should review your dental patient lifetime value at least yearly. You have to know this number, but you also have to realize that you cannot nail this number down to a penny. This is an approximation to use for management decisions.
What Goes Into the Calculation of the Lifetime Value of a Dental Patient?
The variables for the lifetime value of a patient are as follows:
- Total collections over period (TC)
- Number of active patients over prior period (LP)
- Number of active patients over period (AP)
- Average collections per new patient visit (NC)
- Number of new patients over period being measured (NP)
- Your direct costs over the period (DC)
- Total number of patient referrals over the period (PR)
Let’s make this a hypothetical with a one year period:
- TC = $800,000
- LP = 1,200
- AP = 1,250
- NC = $300
- NP = 150
- DC = $150,000
- PR = 75
- When we say collections, you can use either actual collections or net production.
- When we say over period, it’s easiest to do this over a year period. But if you use a different time period, make sure it is consistent over the course of the calculation.
- Direct Costs do not equal overhead. Direct Costs for most dental practices are hygiene, assistant, and associate wages + benefits, dental supplies, and lab fees.
- If you want to skip the example and get straight to calculating your own dental patient lifetime value, download the worksheet.
The calculation then has a few different pieces:
- Churn rate (the percentage of patients that leave your practice)
- Profit Margin (how much you keep)
- Referral Rate (how often your patients refer new patients)
- Average Collections by Active Patient (you have to remove new patient revenue)
- Lifetime Value (Finally!)
To Calculate Churn Rate in a Dental Practice the Formula is:
- (LP – (AP -NP)) / LP, or from our example
- (1,200 – (1,250 – 150))/1,200
- 100/1,200 = 8.3%
This means that on average 8.3% of your patient base leaves in a year. With this calculated, we can now deduce the average number of years your patients will stay in the practice (patient life cycle) by the following calculation:
100/8.3 = 12 years
Based on last year’s performance we can plan on a patient staying with us for 12 years.
To Calculate the Profitability in a Dental Practice the Formula is:
- (1 – (DC / TC)), or from our example
- (1 – (150,000/800,000))
- 1 – 0.1875= 81.25%
Based on the prior period’s performance, the profit margin for our collections was 81.25%.
To Calculate the Referral Rate for Your Dental Practice the Formula is:
- PR /((AP + LP)/2), or from our example
- 75 / ((1,200 + 1,250)/2)
- 75 / (2450/2)
- 75/ 1225 = 6.12%
The number of patients and the last period’s number of patients are averaged to account for both lost and new patients. We now know that for every patient we have, 6.12% will refer someone to the practice.
To Calculate the Average Collections by Active Patients the Formula is:
- (TC – (NP * NC)) / (((AP -NP) + LP)/2), or from our example
- (800,000 – (150 * 300))/(((1,250 – 150) + 1,200)/2)
- (800,000 – (45,000))/(((1,100) + 1,200)/2)
- (800,000 – 45,000)/((2,300)/2)
- 755,000/1,150 = 656.52
So we know that a patient brings in about $656.52 in revenue every year.
The Final Formula for How to Calculate the Lifetime Patient Value is:
- ((Live cycle * Average Collections by Active Patient) * profitability + NC) + ((Live cycle * Average Collections by Active Patient) * profitability + NC)*referral rate*life cycle
Make sense?! Here it is for our example:
- (((12 * $656.52)*.8125) + 300) + (((12 * $656.52)*.8125) + 300)*.0612*12
- ((7,878.26*.8125) + 300) + ((7,878.26*.8125) + 300)*.0612*12
- 6,401.09 + 300 +(6,401.09 + 300)*.0612*12
- 6,701.09 + (6,701.09)*.0612*12
- 6,701.09 + 4,923.25 = 11,624.33
The first set is the revenue brought in by the patient. The second set is the revenue from the value from the referrals they would bring in over a 12 year period.
You can make an argument to lock in the time value of money into this calculation, but that is in such flux that there really isn’t a point. Just use this more simplified version.