A couple of weeks ago I read a post on Facebook from a technician who had been asked by a practice to reduce his prices and, rightly so, he refused. The practice stopped sending work for a few weeks and then requested a pick-up and resumed sending work as if nothing had happened! I’m sure most of you have similar tales to tell and I think it’s interesting to explore how your work is priced. This article might also give you a few tips to help explain to practice owners why you cannot discount your work or change your fees on demand.
When working out your pricing structure it’s essential to start with your baseline costs, including rent, staff wages, general overheads, and don’t forget your wages! This will give you the per month cost of running your business. For example:
On average 20 working day per month – £16700 / 20 days = £835 per day to run the business BEFORE PROFIT! It’s good to have the numbers worked out as they focus your thoughts on making a profit and not just servicing work for sake of it.
Once you have your baseline number you need to work out how many units a day you can produce with the workforce you have – In the good old days this was quite simple to do as most technicians could produce between 8 – 12 units a day of either ceramic or metalwork but in these days of CADCAM the number of units per day is probably higher. But for argument’s sake let use an average of 10 units per day per technician to illustrate the point.
You have 2 technicians plus yourself and an admin person so 4 people in total.
Cost per day to run the business = £835 / 3 production staff = £278 per person
Average cost per unit £55 – £278 / £55 = 5 units per person to meet baseline costs.
Using these figures (which are for illustration only) would mean that each technician would need to produce 5 units a day to cover the costs of the laboratory. By doing a few simple calculations you can start to work out what your pricing structure needs to be to make the profits you would like to generate with the staff you have.
If you are thinking of growing your business and adding staff, it’s always worth running these types of calculations and knowing how many extra units you need to maintain profitability. If you need help with the numbers, it can be a good idea to chat to your accountant or bookkeeper as they should be able to give you the key numbers without too much trouble.
A word about discounts
It can be very easy to give a discount when you’re under pressure not to lose work, but understanding the cost of a discount and how this can erode your profits is essential.
A dentist that sends you £5000 worth of work a month phones to say he likes working with you but he thinks your prices are too high and can they have a discount. The first thing to say is that you don’t routinely give discounts and you need to have a couple of days to work something out. Agree a day and time to phone back. If you give this dentist 10% discount it will take £500 out of your pocket and if you give them 15% it will cost you £750! This would put pressure on your profits and potentially erode your business.
If the regular selling price of a crown is £50 and the cost of production is £25 this leaves £25 profit. When you give a discount of 10%, your costs don’t change but your profit will be reduced to £20 and if you give a 15% discount you will be left with only £17.50 profit per unit. A 15% discount would mean that you now need to produce a third more work to standstill! You need to ask yourself – Can my business afford to offer this level of discount and do I want to go down this spiral.
Once you have considered all the facts it’s time to call the dentist back and have a conversation to explain ‘business owner to business owner’ how offering a discount could erode your business and ideally you would like to add value to the dentist by offering a complimentary service – for example, free shade taking. If you really feel its necessary to offer a discount you might want to consider asking the dentist for more work to help with the shortfall a discount would leave or negotiate better payment terms, however both of these options can be hard to control in the longer term.
At the end of the day, it’s all about the bottom line and looking after costs and pricing will result in better profits…And after all, you’re not a charity!