I was reviewing the six-month practice statistics for a client a few weeks ago and I noticed that his adjustments (discounts, write-offs, courtesies, etc.) had increased from a slightly high 6% of his gross production to a very high 9% of his production. His production was averaging $152,000 a month, and he had not grown at all in the past year, so in one year his adjustments, made up mostly of discounts, had increased from $9,120 per month to $13,680 per month. On an annualized basis, he was adjusting off $54,720 a year more than he had in the previous year! Since his case start totals and his production had remained stable (and assuming his overhead had remained stable) his personal net income for the past year had declined by that $54,720!
When I asked him what practice policies had changed, what new discounts he was offering, why his discounts had increased by $4,560 a month, he said he had no idea. He had seen a reduction in his net income of almost $55k per year but had not even looked at what he was giving away as a possible source of the problem.
I asked his staff to print and send to me a couple of adjustment reports – itemized lists of every non-production, non-payment, transaction posted to the accounting system. I had those two reports that same afternoon (thank you, Lord, for PM systems that .pdf their reports) and in a few more minutes was able to learn that their “Marketing” discounts had increased by $2000 a month, the “Family” discounts had increased by $1200 a month, his “Professional” discounts had increased by almost $800 per month, and something called “Special” discounts made up all of the rest of the $4560 increase!
In a call a few days later, during which I presented this information, the doctor agreed that he had increased his “Marketing” case starts (Smiles For A Lifetime) from two to six cases a year. He had increased his “sibling/family” discount from $200 to $400 per case, and had increased the discount to employees of referring doctors as well. The “Special” discounts turned out to be a new creation which was a completely arbitrary discount he offered to certain patients when he “felt like doing it.”
It is important to note at this point that this doctor always posts full “retail” fees for every case start and posts a discount if that patient is entitled, by practice policy or doctor’s whim, to a reduction in the regular fee. That is a policy mandated in the “Zuelke” system because there is virtually no hope of understanding what your true Production is unless you post full retail fees and there is absolutely no chance of having any reasonable control over embezzlement if you are not posting full retail fees. If you do not post full retail fees you also have no idea what you give away in discounts, courtesies, etc.!
Please note that this practice had not grown during the past year. He believed that participating with Smiles For A Lifetime and similar organizations would help his image in the community and assist in building his practice. He believed that offering larger “family” and other discounts would somehow generate more referrals. Yet that has not happened!
While it is true that the results of marketing often take a good deal of time to show up in a practice, this doctor had been offering healthy and appropriate sibling/family, professional, discounts, and doing “Smiles” and other donations for years. The results of that marketing were already “built in” to his practice performance but he believed that increasing the amount of his discounts and finding new ways to offer discounts would obtain even greater benefit. Of course he found that not to be the case!
Z&A strongly supports and encourages our clients to provide orthodontic care to charity cases, to offer “sibling” or “family” discounts, and to offer discounts to referring doctors and to members of referring doctors’ staff. Some are offered as a pure act of charity but some such discounts are also, and properly, done for marketing purposes. Doing a “Smiles For A Lifetime” case is certainly a contribution to society and for many doctors is a feel good issue, but it provides nowhere near the marketing benefit of doing the same free case for a needy person identified by a teacher or principal of a local school or a local charity. Sibling patients or new patients referred by existing patients do not choose to start with you because you offered them a discount! They came to you on the strength of the referral or because the sibling had a great experience. The amount of the discount you offer is not significant! The acknowledgment, and not the amount of the acknowledgment, is what is important.
Again, there is not a shred of evidence that offering a discount from your regular fee is a significant inducement for prospective patients (the type of patients our clients are seeking!) to start into treatment and we have seen significant evidence that practices offering discounts as an inducement to come for an exam or to start into treatment do not do a bit better than doctors in the same community who do not offer such discounts. There is an exception to this last statement. Doctors who are willing to build the “discount practice” reputation and abandon quality marketing in favor of discount advertising can and often do build large and profitable practices but they are filled with the type of patients who were only attracted because of the discounts. Nothing wrong with that I suppose but it’s not the vision I have of a “quality” practice.
This is not rocket science! Quality patients come to you because of the quality of the referral, the quality of your reputation, and/or the quality of their personal experience with you with a previous child. We would assert that the practices enjoying high productivity, profitability, and quality of life within the practice do not accomplish that by discounting their fees or by marketing in a fashion that publicly/nationally promotes their charitable contributions.
So, back to the original intent of this article. A healthy orthodontic practice should not give away/adjust off more than 5%-6% of gross production. While every orthodontist must write off/discount the amount he/she is comfortable with, our recommendation is that Paid In Full discounts should total no more than 1% of gross production. In an economy where patients still want to avoid debt (even interest free debt), and when savings accounts still earn 1% or so, to keep paids in full at an appropriate level today the discount offered will need to be 2% or perhaps 3% of the case fee at most! Bad debt write-off should never exceed 1/2 of 1% (.005) of gross production. All other discounts and courtesies should total no more than 3.5%-4.5% of your gross production! Most important perhaps is to never be the orthodontist who says, “I have no idea what I give away.”