Laboratory CPR for Growth and Prosperity
Conversion, Penetration, and Retention
By Mark T. Murphy, DDS
The author is taking a chance by borrowing this acronym and applying it to the dental laboratory business. Not because the concept is wrong, but rather because CPR usually refers to cardiopulmonary resuscitation and is a first responder reaction to a life-threatening event. Laboratory CPR, on the other hand, is a way to frame analysis, planning, and systems in your business so that you can be more successful. CPR could and should be used every day to help orient us toward making better decisions that are aligned with our vision, goals, and objectives.
Economic downturns do not create the problems we experience—they simply magnify them. If we do not have strong systems in place to help us achieve optimum efficiency and effectiveness, then weak or non-existent systems breakdown more rapidly when the GNP struggles, markets fall, and unemployment rises. During the most recent recession and really slow recovery, I hear from many laboratory owners that they have slowed, dentists are doing less work, and they need more new clients.
Sometimes how we look at the problem is the problem. Recently, a laboratory owner was discussing how he was down year over year (again). When the author asked why, he said his clients were simply not doing as much work. His solution was that he needed more “new” clients. The author asked what his customer retention was. His eyes crossed and he wrinkled his brow. The author then asked if every dentist who was doing business with him last year was still working with him this year. He replied just about all of them. When we looked at his data, there were only six clients in this million dollar laboratory who had left during last year. However, after doing the math, this seemingly insignificant loss still resulted in a noticeable loss of income. If each customer spent, on average, $1,400 per month; 12 months multiplied by six clients is just over $100,000, or 10% of the laboratory’s yearly income. If your retention rate is 90% of clients or dollars, you start the next year as a smaller laboratory. If you add six new average doctors to replace them you would be flat year over year. If new clients join you during the year, but not on January 1st, or if they do not start at the $1,400 per client average, you will be down during the second year.
Common business strategies can also backfire when looking for new clients. For example, if you are attracting new clients by aggressively promoting a $99 monolithic zirconia restoration instead of your traditional PFM, you may need twice as many new customers to make up the revenue. The shift from a $150-200 or more PFM solution to the all-zirconia crown causes a decrease in your ASP (average sales price) per unit. The author sees laboratory owners who start the new year down 15% to 20% in sales revenue because of retention and ASP issues. The suggestion here is not to stop selling zirconia restorations—the net margins may be spectacular—but rather to strive to understand the changes such a move causes in revenue, so that when making decisions regarding how to spend marketing dollars, you choose the best return on your investment. Acquiring a new client is always more costly than keeping an existing one. As this column evolves throughout the year, we will dive deeper into retention, penetration, and then finally conversion discussions. For now, let’s cover the CPR matrix well enough that you are free to look at your laboratory’s marketing spend differently.
According to the ADA Survey on the Use of Dental Labs July 2009, the average dentist purchases from just over three laboratories. In addition, the average general restorative dental practice has a revenue base of more than $700,000/year. With somewhere between 7-9% of that number going toward laboratory expenses, we should expect the average dentist to have an annual laboratory bill of at least $50,000. There is certainly variation between practices and their revenues, so with great latitude in the individual experience, this does suggest that the average dentist bill with the average dental laboratory should be about $1,400 per month. ($1,400 multiplied by 12 months multiplied by three laboratories per dentist is about $50,000).
What are your customers buying from you? Just as importantly, what are they buying from someone else? If that product is something that you can provide, how can you earn their business and sell them other restorations? This is the second key to successful application of your marketing dollars toward growth. If you can retain more clients and then sell a little bit more to each of them, do you really need as many new clients as you think? Let’s have a look.
Just for the fun of it, suppose the million dollar laboratory mentioned earlier has 60 dentists buying from them in any particular month. They average $1,400 monthly (60 multiplied by $1,400 multiplied by 12 is just over one million dollars), and just as in the example above, six of those clients leave during the year. Even with no new clients, if you find a way to cross sell existing clients into some of your other restorative products and services and drive your average laboratory bill up from $1,400 to $1,555, you would be able to earn just over one million in revenue.
So do we even really need new clients? Of course we do! We want growth. We want our marketing to drive all three components of the CPR matrix. Laboratory owners should note that the order should be Retention first, Penetration second, and then finally, when those systems are performing well, adding new clients. But how do laboratories determine which new clients are right for their business? Strategically planning your laboratory’s mission, goals, and objectives according to your own personal vision will help to determine which new customers will be the best for your business.
By framing your choices about select behaviors with a CPR approach, you can develop systems that support your vision of how you want to laboratory to function. It is far more effective than trial and error or solving problems that we are looking at the wrong way. These concepts feel awkward to us at first because we didn’t go to business school. But we are a business. By applying CPR you can run your laboratory the way you want, be more successful, and enjoy less stress.
This column will ultimately discuss C, P, and R in more detail in future issues of IDT, and as we work through each, we hope you develop a clearer and more effective way of measuring, monitoring, and managing your business. See you next month when we dive more deeply into the Customer Retention factor.
Mark T. Murphy, DDS is the Lead Faculty for Clinical Education at MicroDental/DTI Dental Technologies Inc. in Dublin, CA