National banks have long seen and talked about the current inflation that has followed in the wake of the Corona crisis. So far, the Fed in particular has tried to talk down inflation as a passing phenomenon.
Inflation has so far been strongest in the US, reaching 8% on several occasions. In Europe, inflation has also risen, albeit at a more moderate pace. Inflation in Europe is currently at about 3%.
We will come back to this.
The impact of inflation on dental practices
Can't we just be unconcerned about inflation? The dental industry is running as it always has, and as long as there are no dramatic political interventions, things tend to go very well.
If we look at world markets again, you have probably heard about the supply shortages that have hit the world as a result of the many Covid-19 shutdowns. When supply chains are under pressure, bottlenecks occur and so do supply shortages. When demand exceeds supply, prices rise.
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Plastics are extracted from oil. There is a general shortage of oil throughout the world. Not because we don't have oil in the underground. In fact, the world has never had such large, known oil reserves as we have today. There just isn't enough capacity in the refineries to process the crude, just as there isn't enough tank capacity to ship it around the world. That means we can look forward to rising prices for the materials we work with in the practice.
Wage increases
It may well be that rising prices for bonding, composites and aligners are affordable. But what is the effect of an inflation?
When inflation rises, it's a reflection of rising consumer prices. Which always leads to a demand for higher wages, also among the practice's employees. Practice owners will probably agree that the staff groups in the practice have already been favoured with very high salary increases in recent years.
If we do not take into account the rising costs and regulate the prices of our services accordingly, it could have quite dramatic consequences. In fact, most practices have already felt the consequences, but may not have been as aware of them, yet.
Employed dentist or practice owner
In the past, it was quite easy to create a relatively lucrative business as a practice owner. Today, the situation is quite different. In many dental practices, it is more lucrative to be employed as a dentist, rather than being a practice owner. At least if you look at hourly remuneration. The reason is linked to rising costs. Which we will have to deal with in the near future.
Passion can drive us forward for a long time. But if there isn't some kind of reward, besides passion, being the owner of a dental practice, will suck in the long run. The passion risks ending up changing character and develop into depression instead. I think that would be a shame.
Just to illustrate my concern:
Most dental practices are extremely vulnerable. We saw this most recently during the first Corona shutdown, when Dental Associations estimated that up to 20% of all practices would go bankrupt after 3 months of shutdown!!!
Many practices only have a profit rate of 5-10%. This is not very much for a business with such high operating costs as a dental practice.
A few examples of the impact of inflation on profits
A practice with a 5% profit rate that experiences a 1% increase in practice costs will experience a 20% decrease in profit. Unless compensated by higher productivity or price increases.
20%!!!!......
Inflation indirectly gives us a 3% cost increase.
With 3% inflation, in this example, it would result in a 60% decrease in profits!...
Based on the same assumptions as in the previous example, a dental practice with a profit rate of 10% would experience a 10% decrease in profit for a 1% increase in expenditure - and a 30% decrease in profit for a 3% increase in expenditure.
I think this is worth bearing in mind the next time you offer a patient some sort of discount on treatment.
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Classic advice
The accountant will point out 2 areas where the practice can meet the increasing costs:
Minimise costs.
Increase revenue
The trouble is that accountants are rarely well qualified to help identify specific actions that will save money and/or increase profits in a dental practice.
I have heard several dental practice owners ask their accountants how they could best minimise the practice's costs in the areas identified by the accountants as areas for action. To this, the accountants typically respond that it is the practice owner's job to figure out. After all, they were just accountants and specialists in identifying areas in the books that stood out from "best practice".
Similarly, I have heard the same kind of stories about how there should be opportunities for optimising earnings in some specific areas measured in the books. When asked about specific solutions, accountants typically responded that it's up to the practice owner to figure out.
Another round of savings?
Should you choose to focus on savings or earnings? I've previously argued why, for most dental practices, it doesn't pay to focus on cutting costs.
When it comes to focusing on increasing revenue, there is the hard way and the easy way. The hard one is about the way we offer treatment and organise ourselves in the practice. In my opinion, this approach is something all practices and patients benefit from the most in the short and long term. But as indicated, it is not easy. It requires time, focus, a dedicated team and good counselling along the way. In case you would like to improve the communication skills of yourself or your team. I encourage you to participate in the course: "get to yes" patient communication 2.0.
The easiest way
The obvious easy way is to raise your prices.
As the prices of many dental services has generally remained completely unchanged over the last 15-20 years, the profitability of the services has declined. Not just a little, but quite drastically. If this continues, it will become increasingly difficult to run a dental practice with a financial profit.
Just ask an American practice owner how prices have fared in the many practices that remain in network with American dental insurance companies. Here, the insurance companies dictate the prices of individual services in the dental practices. While the Insurances have let their insurance prices rise in line with the Consumer Price Index, they have not changed the payments to the dentists at all!
With a market situation where the supply of dentists is too low in relation to demand, it makes no sense to maintain prices at a level where the profitability of the practices just keeps falling.
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It's virtually risk-free
A 4-5% price increase will not be noticed by patients. I have seen several examples of prices being raised by up to 20% without a single patient noticing. However the more you raise your prices, the more important the experience patients receive in the practice will be. Higer fees requires the the practice to stand out from the competition and build strong relationships with its patients.
The dynamics of price and price perception is an area that I find super exciting. But in order not to have the blog devolve into a full novel, I'll stop here for now. I hope this week's post has helped raise your awareness of the need for ongoing correction of practice prices to reflect, at a minimum, changes in inflation and/or the Consumer Price Index.
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What are you best at?
What brings most value to the practice in the shortest amount of time with the least effort? It can be difficult to define when you are buried in dental work, insurance claims, staff schedules, payroll calculations, small repairs, implementing the latest regulations from some government agency all while trying to be pressent in a busy family life.
If you want to make things easier for yourself without risks or additional costs, you are always welcome to write or call me.
Many kind regards
Jesper Hatt DDS
P: +41 78 268 00 78