I think that one of the biggest fallacies perpetuated in our profession is that if you don't continuously have new sales, your office will die. Do you need new sales to grow and maintain a progressive and efficient practice? Of course! But what happens when you have a “slow” month or two? Does your office freeze? Can you make payroll? Can you cover your fixed expenses?
Over the last 40 years, I have discussed this issue with hundreds of practice owners and feel that there are things you can do to maintain your practice during downturns in new aid sales. The key issue is to change your thinking about revenue intake from “sales” to “time.” The combined thoughts of “fee for service” and “margin” must be wed into a dollar-per-hour flow necessary to meet the practice needs.
Calculating Monthly Costs
The first figure needed to come up with this dollar-per-hour rate is the monthly fixed cost for the practice, including rent, utilities, supplies, salaries, and so on for any and all recurring expenses. Then, look at the available revenue-producing hours per week. No, that number is not 40. Take into account the time to write reports, return calls, make follow-up calls, enter progress notes in charts, interpret results, and all the other nonrevenue-producing items we do every day. For argument's sake, let's assume there are 30 revenue-producing hours per week, unless you want to work 60 or 80 hours per week for a different breakdown. (This usually happens when you are young and indestructible.)
So we have 30 hours per week, which means 30 hours multiplied by 50 weeks a year (two-week vacation), or 1,500 hours per year. Divide your fixed expenses for the year by 1,500, and you get the base hourly rate you need to keep the practice afloat.
That's nice, you say, but what does that mean when I have a new binaural sale for $6,000? I know what my margin is and how much I make for the sale. But how do you look at it? The sale is $6,000; the cost of goods (COG) is, say, $3,000, so your margin is $3,000, and, in two hours of work, you made the full profit, right? Wrong! You need to look at it this way: How much time have I contracted to see this person over the warranty period and what is the COG, and then subtract those figures from the sale price. How much you need to make per hour is going to reflect this amount.
Let's continue with this example. We need to account for the initial consult with the patient (1.5 hours), including testing, counseling, and sale. Then we have to consider processing the order (0.5 hours), entering the data into your office management system (0.3 hours), receiving the order from the supplier and entering the data into the office management system (0.5 hours), calling the patient to set up the appointment for delivery (0.2 hours), and seeing the patient for fitting and programming (1.0 hours), first follow-up appointment (0.5 hours), second follow-up appointment (0.5 hours), and possible third follow-up appointment (0.5 hours). This brings us to 5.5 hours so far, and we will then see the person once or twice over the first year for another hour of time.
Does the aid have a three-year warranty? Let's add in the time that will be spent over those three years, which, if all goes well and no repairs take place, will be an additional 3.0 to 4.0 hours. So we are then looking at an average of 10 hours. If there are any repairs, we need to add an additional 1.5 to 2.5 hours for sending, receiving, and delivering the aid back to the patient. However, that projection only works if there is just one repair during the three years, and we all know that, typically, one aid goes at a time, so let's double that time commitment to 5.0 hours. We are now up to 15 hours over three years at no additional cost to the patient.
Let us return to the monthly costs:
- Rent, $2,000.
- Utilities, $350.
- Front-office staff, $3,000.
- Back-office staff, $3,000.
- Owner's salary, $8,000.
- Taxes on payroll, $1,200.
- Phone, $300.
- Equipment leases, $1,000.
Again, this is just an example. In this example, we have a total of $19,350 per month. Multiply this by 12 for a total of $232,200 per year. At 30 hours per week, we have 1,500 hours per year to make this amount of money. Dividing $232,200 by 1,500 gives us $154.80 per hour minimum rate—with no growth, expansion, repairs and maintenance, etc.—so we will round up to $165 per hour. This figure can further be refined to $2.75 per minute.
How does this relate to a sale that gives a $3,000 profit? Take 15 hours of time and multiply it by $165, and we get $2,475. So for each sale where we make this margin, we get greater than the minimum needed to keep the office afloat. But wait, it was really a monaural sale. The margin was only $1,700 (no binaural discount), and the hours were almost the same for the patient, so let's use 10 hours. Multiply it out—10 times $165—and we get $1,650. This is an easy breakdown of what the profit really is, spread over the year, not just the day.
Time Is Money
Most professions charge for their time—attorneys, doctors, accountants, plumbers, electricians—but we seem to be stuck in this new sales briar patch. We all have patients who come into the office with aids that are out of warranty. Do you do free work to keep them? This proves that your time is worth $0 per hour and puts the value of the warranty into question. Don't say it doesn't; you are using your time, utilities, materials, and, oh yes, your expertise and charge nothing, so that is what the value is to the consumer. Keeping in mind that you need to generate $165 per hour, let's look at what you should be charging.
Examples could be:
- General cleaning of the hearing aid—10-15 minutes, $25.
- Tubing change—five to seven minutes, $17.50.
Keep within a comfort zone for your area, with some prices at a little above and some a little below the calculated amount for smoother pricing structures. Manufacturers' repair costs should be calculated according to the estimated time for entering, sending, receiving, checking, delivering to the patient, and servicing the unit for the warranty. A perfect example is an estimate of 1.25 hours for a one-year warranty repair, for a fee of $206.25 over the cost of the repair. But you can't wait for the invoice each time, so you estimate the average cost and set a fixed price of say $325 for a one-year repair and warranty.
We always have the ability to discount or wave fees in extreme cases, but the value of our services and the actual amount of the discount is realized by the patient.
Using this method, we can set fees in the practice that will help generate revenue from our service and our time, which will cover the same income as the true margin on the new sale. We should be able to generate as much income from a week of just service as we would from new sales. I know we all would like to have all our weeks be 10 to 15 new units, but, in the real world, we have to service these new sales, and that takes some time out of the day, too. Not all weeks are big sale weeks. We still see patients the weeks we have no new sales, and our knowledge and skills are really worth something so charge for them and be in business when those people who just bought hearing aids need service over the next three years.
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