Ep. 52: The Top 6 Profitability Killers in a Dental Practice, Part 1
The ability to control the overhead and profit margin in your dental practice has always been important. During times of economic uncertainty, you could say it becomes urgent! The question is where to start! In this week’s (and next week’s) episode, Jeff focuses on the top changes you can make in your practice that can have the greatest impact on reducing expenses and improving profitability.
Topics:
2:23 – The biggest problem: Profitability Killer #1!
11:18 – How addressing this issue affects your overhead percentage.
12:42 – Profitability Killer #2 – and how to prevent it.
17:52 – Profitability Killer #3, how it happens, and what to do about it.
34:00 – How this affects your overall expenses and practice growth.
35:13 – The Overhead and Profitability Coaching Session
Links:
Downloads for this episode - https://www.mgeonline.com/overhead-materials/
ABCs- https://www.mgeonline.com/mge-communication-and-sales-seminars/
Coaching Session- https://www.mgeonline.com/overhead-and-profitability-coaching-session/
Learn more about MGE - https://www.mgeonline.com
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Questions From This Episode
What's the number one profitability killer in most dental practices, and why isn't it a traditional expense?
Unrealized potential, income a practice should already be earning but isn't. It's worth treating as an expense rather than a missed opportunity: if a practice should be collecting 90,000 dollars a month and is only collecting 60,000, that 30,000 dollar gap functions exactly like a monthly expense, just an invisible one, since it's usually the single largest number on the practice's entire financial picture.
How does improving new patient phone conversion actually translate into real revenue?
Significantly, and without added marketing spend. The average US practice converts about 23 percent of new patient calls into actual patients. Raising that to 50 percent on the same 100 monthly calls adds 27 new patients a month, and at the average first year revenue of 1,200 dollars per new patient, that's roughly 32,000 dollars in additional monthly revenue from fixing a process, not from spending more to generate leads.
Why can buying equipment like a same-day crown machine sometimes hurt profitability instead of helping?
Because the equipment itself doesn't create new demand, it only serves demand that already exists. If a practice isn't already doing enough crown volume to justify the lease payment, the equipment can end up costing more than simply sending cases to an outside lab did before. The fix is building the case volume first, through better case acceptance or patient flow, then acquiring equipment to serve that volume, not the reverse.
How should you actually judge whether your marketing budget is working?
Track two numbers specifically: how many inquiries, calls, form fills, any contact, your marketing generates, and your acquisition cost per inquiry. Marketing's only real job is generating that initial contact, not the new patient directly, so if a campaign isn't producing inquiries, or the cost per inquiry is too high relative to other channels, that's the actual problem to fix, not a reason to abandon marketing altogether.
Why should PPO write-offs be thought of as a marketing expense rather than just a discount?
Because every cost of delivering that treatment, staff time, lab fees, supplies, rent, stays exactly the same regardless of what the insurance plan actually reimburses, so the gap between full fee and the discounted PPO rate functions precisely like an acquisition cost. Unlike a one-time postcard expense, that cost repeats every single time you treat that same patient, which is why heavy PPO participation can quietly inflate every other overhead percentage in the practice.
Episode Transcript
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With newer clients, we regularly survey what they feel is the biggest problem or source of stress in their practice, and 60 to 70 percent of the answers boil down to three things: new patients, case acceptance, and profitability. Here's an interesting way to look at that: profitability is the obvious one, but new patients and case acceptance both ultimately funnel back into profitability too. Struggling with new patients means shrinking revenue and eventually less profit. Struggling with case acceptance means less production accepted and collected, which again means less profit. So really, the overwhelming majority of what clients tell us is bothering them comes back to the same underlying issue: not enough profitability.
If you're looking to improve profitability, there are plenty of places to start, you could go line by line through your P&L. But there are six specific changes that have a dramatically larger impact than everything else, six areas that give you the most improvement for the effort involved. That's what I want to cover this week and next week, a two part episode on the top six profitability killers in a dental practice, what they are, and how to fix each one. My name is Jeff Blumberg, and I'm your host.
Let's jump straight into number one, the single biggest profitability killer. Before I tell you, take a guess. What expense do you think it is? I'll tell you now, it's probably not what you're expecting, because it isn't even a traditional expense. It's unrealized, or wasted, potential.
To be clear, I don't mean unrealized potential in the sense of, you have ten operatories and you're only using five, so if you just built out more space or added chairs. That's not what I'm talking about. I mean income you should already be earning right now that you simply aren't. You could frame this as, I should be collecting 90,000 dollars a month but I'm only collecting 60,000, so there's 30,000 dollars of untapped potential. I'd actually recommend framing it differently: that gap functions exactly like an expense. If your practice should be collecting 90,000 dollars a month and it's collecting 60,000, you're effectively spending 30,000 dollars a month, or 360,000 dollars a year, whether you realize it or not.
Here's a real illustration. We run a series of nine days of seminars called the MGE Communication and Sales Seminars, sessions A, B, and C, three days each, run monthly on rotation, something we've been doing since the early 1990s. They teach communication and sales skills, helping patients genuinely want the treatment they need. The average client sees close to a 300,000 dollar increase in the first year alone.
Here's how that typically plays out. A client attends their first session, spends three days learning, goes back to their practice, and the following month usually sees a 10,000 to 20,000 dollar or larger increase in collections, not just production, in that very first month back. And it's not a one-time bump, it continues to grow from there.
What actually changed? They didn't add chairs. They didn't hire additional staff. If they were running new marketing, it likely hadn't even had time to kick in yet, marketing takes time to show results. All that changed was how the doctor communicated with patients, existing patients of record who'd previously declined or partially accepted treatment, and new patients who otherwise wouldn't have said yes.
So think about what that really means. A doctor going from 60,000 to 80,000 dollars a month didn't take on significant new expense, maybe a modest bump in lab fees or supplies, maybe a temp assistant here and there, but nothing that meaningfully impacted overhead. That extra 20,000 dollars in potential collections was always there, sitting untapped for months, likely years, before they ever addressed it. They didn't need to spend more to access it, they just weren't capturing it yet.
If you looked at that doctor's P&L before the fix, that 20,000 dollar monthly gap in unrealized potential was almost certainly their single largest expense line, even though it never technically appeared as one. Profitability ultimately comes down to revenue in versus expenses out, you can make a lot and spend a lot and net very little, or make a moderate amount, spend conservatively, and net considerably more. Capturing unrealized potential addresses the revenue side of that equation directly, without meaningfully touching the expense side.
If you want proof this is happening in your own practice, look at your recall schedule for any given day this week and review the incomplete treatment sitting there, not new patients, since you genuinely don't know what a new patient needs until you see them, but existing patients of record. How many cases needing six crowns are only getting two, simply because that's what insurance happens to cover that year? That's real revenue being left behind, and more importantly, it's a patient who isn't as healthy as they could be, which is honestly the more important half of this conversation.
Here's another concrete example along the same lines: your new patient intake process. I've gone into this in depth in the reception episodes, but the average new patient phone conversion rate in the US is 23 percent, meaning out of 100 calls, 23 actually become patients. Improve that to 50 percent on the same 100 monthly calls, and that's 27 additional new patients a month, with no additional marketing spend.
If you're currently getting 23 new patients a month, you're very likely receiving around 100 inquiries to get there. Some of those inquiries are shopper calls, someone asking what a crown costs, and it's worth remembering that shoppers aren't a lesser category of prospective patient, we've all comparison shopped for something at some point, that's simply normal consumer behavior. And someone asking about a single crown often actually needs more than one, so handling that call well can be genuinely valuable.
The average first year revenue from a new US dental patient is about 1,200 dollars, and that's without any dedicated sales process in place, just a general average. So if a practice getting 100 new patient calls a month, converting 23 of them, improved that conversion to 50 percent, that's 27 additional new patients monthly at roughly 1,200 dollars each, about 32,000 dollars in additional monthly revenue. And the cost to achieve that improvement is close to nothing, it's a process and training fix, not a spending fix.
This is genuinely where most practices are losing the most money right now, not hypothetically, but literally, in potential that already exists and simply isn't being captured. That's profitability killer number one.
Here's how this connects to your overhead percentage specifically, since overhead is calculated relative to revenue. Say your practice collects 60,000 dollars a month with 40,000 dollars in overhead, that's a 67 percent overhead ratio. If you go from 60,000 to 80,000 dollars purely through better communication and case presentation, without meaningfully increasing expenses beyond a modest bump in lab and supply costs, your overhead on that same roughly 40,000 to 44,000 dollars in actual costs drops to somewhere around 50 to 55 percent. You've gone from 67 percent overhead to roughly 55 percent simply by capturing potential that was already sitting there, without adding a single new expense category.
So that's the big one, profitability killer number one. Let's move to the remaining five, which I'll go through one at a time along with practical ideas for addressing each. Quick note before I continue: I have a link to the Communication and Sales Seminars on the episode page, along with the MGE Overhead Sheet, which breaks out roughly 20 categories that typically appear on a dentist's overhead statement. We built this years ago after repeatedly seeing clients tell us their overhead was 40 percent, only to discover it was closer to 50 percent once every category was properly accounted for. There's also an Overhead Guidelines handout showing target percentages by category, for example, rent generally shouldn't exceed 4 to 5 percent of revenue. Both are available as downloads on the episode page, and I'll be referencing them going forward.
Profitability killer number two: loans and leases. This category tends to become a problem not because a newer practice is financing legitimate startup equipment, but because equipment gets purchased without a real financial case behind it, meaning it ends up costing the practice more than it actually generates.
I'll admit I'm something of a technology enthusiast myself, dental trade shows are full of genuinely exciting new equipment, and there's nothing wrong with wanting the best tools available to serve your patients well. But it's worth evaluating certain purchases carefully. I remember when same-day crown milling systems were first gaining popularity, and I saw practices with lease payments of 1,200 to 1,600 dollars a month for a machine, when their actual outside lab bill before that had only been around 500 dollars a month. Between the lease and the added chair time to mill and finish the crown in-house, the total cost ended up higher than simply sending cases to a lab, despite same-day crowns being a strong marketing point. The volume of crowns being done simply wasn't high enough yet to justify the equipment.
The same logic applies to something like an in-office CT scanner, worth asking honestly how many scans you'd realistically be doing monthly, and whether that volume covers the lease payment, versus referring patients out for imaging when needed. This pattern shows up with practice relocations too: a smaller, comfortable practice with room to grow sees an appealing new space nearby, doubles their rent to expand into it, expecting the move itself to drive growth. Often revenue stays flat or grows only modestly while expenses rise significantly, and profitability actually declines.
The underlying principle: acquiring equipment or space to support existing, growing demand is smart. Acquiring it hoping it will independently generate new demand on its own frequently doesn't work out. Before any major equipment or space commitment, the real question is simply, does this realistically improve revenue enough to justify the cost, beyond the obvious baseline of maintaining quality care.
Profitability killer number three: marketing and public relations. Our overhead guidelines put advertising spend in the 3 to 5 percent range generally, though that can run higher during an aggressive growth phase for a newer practice. The real test of whether marketing spend is appropriate is whether it's producing a commensurate return, if you increase marketing spend and new patient volume increases proportionally, that's working as intended.
When marketing budgets get out of proportion to their actual return, it usually comes down to one of three things. First is a fundamental misunderstanding of what marketing is actually supposed to do. When I ask newer clients at seminars directly, what is marketing supposed to accomplish, about 90 percent say get new patients, which is directionally correct but misses a key step. Marketing's actual, immediate job is generating a phone call or an inquiry, an ad doesn't create a new patient directly, it creates contact. Someone sees your ad and either calls or fills out a form, they don't just show up at your door because they saw a Facebook post.
So the real measure of marketing effectiveness is whether it's generating genuine inquiries, and if it isn't, that's the actual problem to diagnose, not a reason to abandon marketing altogether, which is unfortunately a common overcorrection. Two specific numbers are worth tracking closely here: total inquiries, calls, form fills, any genuine contact from someone potentially interested in becoming a patient, including shopper calls, and acquisition cost per inquiry, how much you're actually spending to generate each one.
Here's a simple example. Say you spend 10,000 dollars on a postcard campaign, mailing 20,000 postcards, and generate 200 phone calls. That's 50 dollars per call. Knowing that number lets you compare channels meaningfully, if Google pay-per-click is costing you 75 dollars per call while postcards are running 50 dollars, that tells you something concrete about where additional marketing dollars might be better spent, assuming your target audience genuinely overlaps with your postcard radius.
Referrals meaningfully improve this math too. If a 50 dollar phone call converts into a patient who then refers someone else, your effective acquisition cost for those two patients just dropped to 25 dollars each. If your receptionist is skilled enough to ask a new caller directly whether other household members also need a dentist, and gets a yes, that same 50 dollar call could yield two or three new patients at once, dramatically lowering your blended acquisition cost.
So if you're spending significant money without generating proportional inquiries, that's the first place marketing budgets tend to go sideways. The second, somewhat less common, issue is overspending on individual marketing pieces, elaborate, expensive postcard designs when the actual expected response rate on a standard postcard mailing is around 0.25 percent, meaning roughly 2.5 calls per 1,000 postcards mailed. Most postcards end up in the recycling bin regardless of how nice they look, so it's not worth over-investing in that specific format. Save more polished, higher-cost materials for lower-volume, higher-touch situations, like a welcome folder handed directly to a new patient or referral prospect in person, where the volume produced is naturally much smaller.
The third factor, which ties directly to what we just discussed, is receptionist effectiveness. If your receptionist is only converting the national average of 23 percent of calls, that dramatically inflates your real acquisition cost per new patient. Using our earlier example: 50 dollars per call, 100 calls, 5,000 dollars spent, converting only 23 of those into patients means you're actually spending over 200 dollars per new patient, not 50. Improve that conversion rate to 50 percent on those same 100 calls, and your cost per new patient on that same 5,000 dollar spend drops to around 100 dollars.
One more point on this topic, since it comes up frequently, especially with newer clients asking about broader economic conditions. Setting aside the debate about whether we're heading into a recession, it's worth remembering that part of a recession's economic impact is psychological as much as literal, people who haven't lost income still often pull back on discretionary spending simply because they're anxious about the broader climate, which can mean delaying elective dental treatment.
The practical takeaway, regardless of broader economic conditions: think of your practice like a ship heading into potentially rough water. You want everything running as efficiently as possible beforehand, no unnecessary waste, no underperforming spend, nothing left unaddressed that you could reasonably fix now. Which brings us to one more marketing-adjacent point worth reframing: managed care participation, PPOs specifically.
Consider a practice writing off 25 percent on its PPO participation, honestly a conservative estimate, it's often higher. If that practice produces 80,000 dollars in a month at full fee value but only collects 60,000 dollars after PPO write-offs, that's a 20,000 dollar monthly write-off. Every cost required to produce that 80,000 dollars in treatment, staff time, lab fees, supplies, rent, stays exactly the same regardless of what the insurance company actually reimburses. You're paying full cost to deliver the treatment while collecting a reduced fee for it.
Here's the reframe: that 20,000 dollar monthly write-off is functionally your marketing budget for that month, since the entire reason for PPO participation is patient acquisition in the first place, the same reason you'd spend on any other form of marketing. Look at that number against typical marketing guidelines, no reasonable overhead guideline would recommend spending 25 percent of revenue on marketing. If you were actually spending that much on traditional marketing, you'd expect explosive quarterly growth as a result, which heavy PPO participation typically does not produce.
The critical difference: a one-time postcard acquisition cost is paid once per patient. A PPO write-off is paid every single time you treat that same patient, indefinitely, for as long as they remain your patient. It's a recurring acquisition cost that never actually goes away.
It also quietly distorts every other overhead percentage in your practice. Take a 4,000 dollar monthly rent payment. At 80,000 dollars collected, that's 5 percent of revenue, right at the top edge of a typical healthy range. But if that same practice is only collecting 60,000 dollars because of heavy PPO write-offs, against the same 4,000 dollar rent, that percentage jumps to 6 to 7 percent, even though nothing about the actual rent or the practice's real capacity changed. Every category in your overhead sheet gets skewed the same way when true collections are artificially suppressed by managed care participation, which is exactly why working to reduce that participation over time, in whatever way makes sense for your specific situation, matters for the health of your overhead picture overall, not just for the direct revenue impact.
I've run a bit long this week, so we still have three more major profitability killer categories to cover, we'll pick those up next week. Links to everything mentioned today, the Communication and Sales Seminars, the Overhead Sheet, and the Overhead Guidelines, are on the episode webpage. If you'd like individualized help improving profitability in your own practice, we offer a free overhead and profitability coaching session, also linked on the episode page. If you have questions about anything covered this week, email me directly at jeffb@mgeonline.com, call 800-640-1140, or visit us online at mgeonline.com. I'll see you next week, where we'll dig into the remaining three expense categories. Until then, do great, talk to you then.