practice advisors

Marketing… Investing vs. Spending

Allan Barker, OD, and Greg Stockbridge, OD, MBA

Q What percentage of my revenue should I spend on marketing and advertising? I have heard practice management lectures and consultants say three to five percent of revenue.

ANSWER: The question and quoted three to five percent figure can be confusing. When eyecare practitioners use the word revenue, are they referring to gross revenue or net? Are we looking at what is billed out or what is collected? Are we judging revenue on a cash or accrual system of accounting?

CASH RECEIPTS

At the end of the day, only one revenue number makes sense as a measurement criterion. That number is cash receipts—that is, the actual real money that you collect. Then, instead of using a set percentage of revenue, we need to look at what we invest, not spend, as a return on investment. We need to be keeping track of ROI and hitting hard on those things that work.

It is important to have a basic understanding of your true profit per patient. To find this number, you need to know what your average revenue per patient is and also an accurate cost of goods sold. For example, if your average revenue per patient is $300, and your cost of goods is 30 percent, your gross profit per patient is $210.

ALL ABOUT ROI

Let’s say, for example, that you use up your marketing/advertising dollars on one investment that returns a $100 profit per patient. You determine that you have reached a critical point where spending more does not get you more. Why would you not want to invest in another area that returns you a profit of $80 per patient, especially if you are not 100 percent booked out? Why give up on additional marketing if it could bring in money? Why do nothing because you don’t want to invest further?

! INVESTMENT TIP

Don’t invest in marketing or advertising activities that you can’t track. If something can’t be measured, it is difficult to use as an analytical tool.

COSTS TO COUNT

Another part of the question involves what you bundle under the heading of marketing/advertising. Some people define marketing and advertising simply as what you spend on mass media. Ten years ago, this meant TV, radio, newspapers, business cards, direct mail, and office signage. Today we can include websites, search engine optimization, e-blasts, and much more.

Also, don’t forget office, staff, and even doctor appearance. When doctors report a cost as a marketing/advertising expense, they may not be considering all these different line items in a consistent manner. And don’t forget the basics. A soiled carpet, a ripped exam chair, dusty frames, and a disheveled doctor are just as important, if not more so, in marketing than a slick website.

LONG OR SHORT TERM?

Next, consider whether you achieve a long- or short-term return on your investment. Let’s say, for example, that something like Groupon brings people in for a deep discount. Will these people return as lifelong patients or, the next time they need eyecare, will they simply go to whomever is offering the best deal at the time?

Let’s say that another practice invests an equal amount of money yielding a similar initial return on investment. However, instead of a coupon program, it targets its existing patients with an email blast or direct mail campaign announcing a trunk show or a new product. Would the second investment make more sense because of the long-term nature of its gains?

PATIENT LONGEVITY

As part of this analysis, you need to look at the potential “longevity” of the patients attracted by your marketing. Let’s say your marketing piece draws in young, single people who live in condos, and your average revenue per patient is $400. And, what if another marketing investment attracts a family community in which each family has an average of two children? Their average revenue is only $350, but the investment in the family may give you more of a long-term return on investment because of the family size and the longevity of potential patient service.

STEPS TO TAKE

We hope we have you looking a little differently at advertising and marketing, and hope you will view it as an investment requiring a return instead of simply a locked-in percent of revenue. EB

Send Us Your Question

In this new EB column, Drs. Barker and Stockbridge will answer your questions about practice growth, business management, and other practice issues. Please email your questions and concerns to Stephanie.Delong@PentaVisionMedia.com.