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Bobby Haney, DDS
The following recreation of the Eastman Kodak Study is Courtesy of GG12 Coach, Dr. Joe Miranda and Gems Gold Dozen member Dr. Darold Opp, edited and updated by Elizabeth Davidson and Dr. Tom Orent
In the mid 1980’s, the executives at Eastman Kodak were concerned about increasing competition in their industry. They 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 30% net income the ADA reports as the average dentist’s net income today.
At 75% Overhead or 25% profit assumption, here’s what the study determined re: Price Reductions:
• A 3% price decrease requires 13.6% increase in sales to make the same profit as before 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
Consider the above information the next time you read a managed care contract requiring you to reduce your fees even a “mere 15%!!” Now, let’s reverse the process and see how an Increase in Fee 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. If you raise your fees a modest amount, you will lose very few patients. I’ve known offices to raise fees and not lose a single patient! However, to be conservative, let’s figure on losing a few. Now, I don’t want to make light of the concept of losing patients.
I know each patient is important to you and you don’t want to lose a single one. But use the Kodak study to see how you would end up, even if you did lose a few patients. It demonstrates the incredibly positive economic impact of raising fees... and the overwhelmingly negative impact of trying to compete at reduced fees.