Contribution Margin in Your Dental Practice

Episode #387 with Fred Joyal

As a dentist and business owner, it’s important to understand profit. But profit margin isn't the only thing to keep your eye on — you also want to focus on contribution margin. And to explain what this is to help you grow your business, Kirk Behrendt brings back Fred Joyal, co-founder of 1-800-DENTIST, to show you a different way of looking at profit. Dentistry is one of the most profitable industries in the country — and the profit is there for you! To start reducing overhead and increasing revenue, listen to Episode 387 of The Best Practices Show!

Main Takeaways:

Have a great coach. You can't run your business without them.

Learn the different ways to leverage your contribution margin.

Once you beat your overhead, every dollar you produce is a 70% profit dollar.

Help your team understand contribution margin so that they can help you.

Every action either increases or decreases case acceptance.

Quotes:

“Every dentist should have a coach. Why you think you can run your business without coaching — everybody who’s good at anything has a good coach or a great coach. I have two.” (2:49—3:01)

“[Contribution margin is] basically about the profitability of dentistry as an enterprise. And you have to understand that most businesses, as they increase their revenue, their profit often decreases. But normally, it stays very static. It doesn't change direction. Like, if they go from making $5 million a year to $20 million a year, their profitability, their percentage of profit, doesn't increase.” (5:41—6:16)

“I love using the example of a supermarket just so people understand how a lot of businesses operate. Supermarkets operate at a 3% profit margin. So, they have to sell $33 million of groceries to make $1 million of profit. There's competition everywhere. Think about the inventory. Think about the waste. Think about the shoplifting. Think about the unions — all of these things that they have to deal with. And all they're going to make is 3%, no matter how big they get. If they move it to 3.3%, they're ecstatic.” (6:17—7:00)

“Dentistry is completely different as a business model [from other industries] because it has a very unique structure, which is, it has what you would say a large percentage of fixed costs versus variable costs. In other words, rent, leases, equipment purchases, supplies, labs, and employees, those are all pretty much fixed. The variable costs are consumables and lab. And so, what happens is, the term is, when you “crack your nut,” when you beat your overhead in the month, suddenly, every dollar you earn after that, you make about 80% profit because all you have is labs and consumables against it.” (7:01—8:08)

“Once you beat your overhead, conservatively, every dollar that you produce in a practice is a 70% profit dollar.” (9:08—9:17)

“Dentists don't experience the contribution margin advantage because they're stuck at that level, the $750,000, or something like that. So, they say, ‘Oh, no. Anything I do, my profitability is only 30%.’ And for them, it is, because somehow, they never break through. But the idea is, at $750,000, you've paid your employees. You're paying yourself $60,000 a month or something like that, or whatever. And that's all you're doing, is you're paying yourself, you're paying your team, you're paying all your fixed costs and all your variable costs. The next $100,000 that you make, it goes right in because you don't have to add any staff. That next $100,000, $70,000 of it is yours in profit. There's no expense against it. And you can keep doing that indefinitely.” (12:09—13:18)

“What's going to happen is, your costs are going to go up, but they're going to be disproportionately low, relative to other businesses, because your fixed costs are covered, which is a huge percentage. So, your payroll is going to go up. Your supplies are going to go up. Your labs are going to go up. But suddenly, if you're operating with the second half of your income at a 70% profit margin, now, what can you do? Add technology that makes you more efficient, chair to chair, getting the patients in and out. You can advertise. So, now, you're spiraling up. You're attracting more patients because you have the money to promote yourself. You can bid more on Google. You can do all of those things because you've got the extra cash.” (13:21—14:17)

“When [dentists] understand contribution margin, they help the team to understand it by saying, ‘Look, we do $750,000. If we do $850,000 next year, bonuses.’ And in this market where it is so hard to attract and keep people, remember, when you make $30,000, $40,000, $50,000 a year, a grand a month is huge. $500 a month means a new car versus a used car. It means savings versus two paychecks away from bankruptcy. So, it’s really important to understand that bonuses work, but you have to lay out the expectation. Which is, you know in your head, ‘I have to get above $750,000.’ And so, everybody has to understand it. Say, ‘We are going into real profitability at $750,000.’ So, we’re going to look at our month and say, ‘We've got to hit $60,000-plus a month. And the goal is to produce $100,000.’ And we can't do what most businesses do, which is just keep stacking the people on, because that reaches inefficiency.” (16:57—18:21)

“The other thing to understand about most businesses, and the data is vast on that, is the bigger they get, the more their profit shrinks. They’ll start a business. And once it’s profitable and it’s going along, they’ll be in the 20% profit margin with 15 or 20 people. They add 50 more people, they add 100 more people — suddenly, the profit margin, eight. Because there's a natural inefficiency to adding people. You need layers of management, and everybody’s getting paid to not produce the end product. And dentistry is not really like that, because the other businesses don't have contribution margin to cover a vast number of extra employees. Dentistry does.” (18:22—19:18)

“The one other way that you leverage contribution margin is if you've got a facility — facilities now are very tech-heavy and they're high-production. If you've got cone beam and CEREC and lasers in the facility, you are a fully digital environment. You can really produce. You can do a single-tooth implant in an hour and get $2,500 to $3,000 for that. But the other thing that — again, we’re looking at fixed versus variable costs. If you say, ‘Well, I'm going to open another office,’ before you've doubled your hours in that facility — because you've got a million-dollar facility that you're doing 35, 40 hours a week of dentistry or less in — you need to add an associate. And that associate works different hours than you.” (22:28—23:25)

“Convenience is one of the best marketing strategies there is. And it beats your overhead even more because you're maximizing the facility instead of opening another practice.” (24:59—25:10)

“If you've brought CEREC into your practice, you have cut your lab costs significantly. And the more you do, the more it cuts your percentage of lab costs, the more blocks you mill yourself, because you've gone from producing $700,000 to $1 million, and you're milling 80% of your blocks or 70% of your blocks instead of them going to the lab. Your lab costs go from 6% or 7% of your costs down to 3% or 4% of your costs or less.” (26:26—27:04)

“Training is certainly one of [the ways to add to contribution margin], because the other way you retain employees is you make the job more interesting by giving them growth. People want impact. They want purpose and they want growth. They want money, but all those factors fit in. And once they get more comfortable with money — now, the purpose is built in. You're helping people in the most profound way when you convince them to take care of their teeth.” (29:29—29:58)

“Learn to meter out your lifestyle. If you could only understand what it took me and most people who are successful and made a bunch of money, is that after about $150,000 of income, all the other stuff you buy makes you [only a tiny bit] happier.” (31:47—32:12)

“There's very little difference between a $100,000 car and a $50,000 car. Very little, except the number of speeding tickets you get.” (32:40—32:50)

“The quicker you move to a point where making a difference in the lives of people around you is where you get your fulfillment, the less crap you need to buy.” (33:38—33:50)

“There was a study done on the profitability of industries, and dentistry was rated the most profitable industry in the country. Now, if that's not happening for you, you just need help. It is there for you. You do not have to figure out how to do that. The beauty is, and I remind people of this: they call you an entrepreneur; you started your own business. No — an entrepreneur has to invent the business from scratch. Dentistry done extremely well, extremely profitably, extremely enjoyably, and in an incredibly satisfying way is being done 10,000 times over across the country. All you have to do is emulate that. Learn how to do that, which is great. It’s all there for you.” (34:51—35:49)

“The other thing about contribution margin is, you can control your hours. You can say, ‘Look, I want to work three out of four weeks. I want a week off every month.’ And you probably need an associate, but that's only probably. You can schedule stuff accordingly and create the lifestyle that works for you that you can do indefinitely.” (35:53—36:17)

Snippets:

0:00 Introduction.

0:56 Fred’s background.

4:17 What is contribution margin?

8:08 Beat your overhead.

9:31 Dentists don't experience the contribution margin advantage.

14:34 Help your team understand contribution margin.

18:23 Inefficiencies in having a bloated staff.

22:18 Contribution margin errors that dentists make.

26:06 Other lessons about contribution margin.

27:58 Other ways to add to contribution margin.

30:45 Advice for dentists.

34:24 Last thoughts on contribution margin.

36:54 Fred’s contact information.  

Reach Out to Fred:

Fred’s website: https://fredjoyal.com/

Fred’s Facebook: https://www.facebook.com/realfredjoyal

Fred’s social media: @fredjoyal

Resources:

Everything is Marketing by Fred Joyal: https://fredjoyal.com/product/everything-is-marketing/

Becoming Remarkable by Fred Joyal: https://fredjoyal.com/product/becoming-remarkable/

Superbold by Fred Joyal: https://fredjoyal.com/

Fred Joyal Bio:

Fred Joyal is a prominent speaker and author focusing on remarkable customer service. Recently retired, Fred was the co-founder of Futuredontics, the parent company of 1-800-DENTIST, which, over 30 years, generated over $1 billion in revenue. He is the author of two books, Everything is Marketing: The Ultimate Strategy for Dental Practice Growth, published in 2010, and Becoming Remarkable: How to Create a Dental Practice Everyone Talks About, published in 2015.