Over 25 years ago, I was introduced to a study commissioned by the Eastman Kodak Company. This study is worth revisiting today given the rising office overhead costs in dentistry today. One of the reasons why overhead is increasing is that your fees have not kept up with the rising costs of providing the care. There are many variables involved in setting your fees and only you can determine an appropriate fee schedule, but here is something to think about.
In the early 1980’s, the executives at Eastman Kodak were concerned about increasing competition in their industry. Prior to the early ‘80’s Kodak had a virtual monopoly on film in US. This changed when Fuji and other Japanese film manufacturers were able to introduce their film in the US at lower prices. Kodak decided to conduct a study to determine the effects of price increases and price decreases on their profitability. The Kodak study assumed a 25% profit percentage (75% overhead) which is rather convenient for our purposes because it is fairly close to the average dentist’s net income today.
Using this 25% profit assumption, here’s what the study determined:
- A 3% price decrease requires a 13.6% increase in sales to make the same profit as before the price was lowered
- A 5% price cut requires a 25% increase in sales to achieve the same profit
- A 10% price cut requires a 67% increase in sales to achieve the same profit
- A 15% price cut requires a 150% increase in sales to achieve the same profit
- A 20% price cut requires a 400% increase in sales to achieve the same profit
Now, let’s reverse the process and compute how an increase in price would affect profit:
- A 3% price increase means the same profit on 90% of sales volume
- A 5% increase means the same profit on 83.5% of sales volume
- A 10% increase means the same profit on 71.5% of sales volume
- A 15% increase means the same profit on 62.5% of sales volume
- A 20% increase means the same profit on 55.5% of sales volume
To apply this study to dentistry, if a dental office had a 75% overhead and raised fees 10%, it could lose 29.5% of the patients and still have the same profit compared to before the fees were raised. The likelihood of losing that many patients is remote.
Consider the Kodak Study the next time you consider your fees. Keep Smiling!