practice made perfect

Promote to Your Practice Location Population

BY MARILEE BLACKWELL, M.B.A., C.P.A., A.I.B.A., AND DONNA SUTER

You've, no doubt, heard some of your older colleagues say: "Do a good job and your patients will grow old with you." But, what happens to a practice when the patients in the area change, yet the practice doesn't?

One basis for understanding the demographic trends in your community — which will sustain your practice and perhaps even enable it to thrive—is to examine your patients ' preferences and analyze their behavior. The practice of optometrist Anna Partlow, which is located in the southeastern part of the United States, is an excellent example of how understanding preference and analyzing behavior impacts both practice gross and net.

Practice for sale

Several years ago, Dr. Partlow sought our services because she wanted to sell her practice to retire early and spend time with her grandchildren. Dr. Partlow told us she wanted her practice appraised, so she could decide whether she wanted to sell it on her own or hire a broker.

In researching her practice's location, we discovered that although the population was growing, the aged 65 and older group was surging at an increasing rate, while the younger population was growing but, at a much slower rate (see "Age Distributions").

We also found that Dr. Partlow's practice was in one of the fastest growing counties in the southeastern United States. In addition to the population growth, median household income was significantly higher than the national average. (In 2000, U.S. median household income was approximately $42,000, according to the U.S. Census Bureau. In comparison, median household income in Dr. Partlow's county was $60,000.)

Because both the employed and an older patients tend to have insurance coverage, we felt that the age distribution on top of the low unemployment would increase revenue if Dr. Partlow had managed her practice properly. (See "Declining Revenue," left.)

Dr. Partlow told us she believed practice revenue in 2003 declined drastically because she worked fewer hours than in previous years. As Dr. Partlow's revenue declined, her practice net also declined. In 1998, her practice net was 35% of the practice revenue. By 2003, practice net had declined to 28%.

An analysis of Dr. Partlow's work hours in 2002 and 2003 indicated that while she worked fewer hours, it wasn't enough to cause the large decrease in revenue during 2003.

Net decline research and analysis

The results of our research and analysis indicated the following reasons for the decrease in Dr. Partlow's revenue and practice net:

The appraisal

Although the demographics of Dr. Partlow's community were excellent, her practice appraised below average because her financial performance was below average. A typical range of appraisal values for an optometric practice is 40% to 70% of collected revenue, according to the Blackwell Consulting Database, and the average price-to-gross multiple is 63%. This means that if we average the price to collected gross revenue multiples, we get 63%. We determined that Dr. Partlow's practice was worth 59% of collected revenue. Therefore, Dr. Partlow's practice appraised below the average price-to-gross multiple.

Having been in practice for 30 years, Dr. Partlow was disappointed about the value. She decided to go through a broker to sell her practice. However, revenue continued to decline prior to making contact with the broker. Because revenue decreases tend to raise red flags to prospective buyers, when Dr. Partlow did contact the broker, he suggested she try to shore-up her practice and wait a couple of years before selling it. Since she wanted to sell the practice at a higher price than the appraised fair-market value, we suggested she work with us to take advantage of the local demographics and therefore improve practice performance.

Our recommendations

We believed that changing Dr. Partlow's external and internal marketing strategies, along with updating the interior of her practice would increase her revenue. As her revenue increased, we believed her practice net would do the same.

In market research terms, customer-purchase behavior is studied through Choice Modeling, while customer characteristics are studied through Segmentation Analysis. Choice Modeling has four sequential and analysis components: awareness/availability, perceptions, preferences and choice. The customer, or patient in this case, must be aware of a service and have access to it, must perceive it as a realistic option, form a preference for it and finally choose to participate in the service.

Market segmentation is a synonym for classification. Wendell R. Smith introduced market segmentation to the marketing field in a classic 1956 article in the Journal of Marketing. Implicit in the concept of market segmentation and its practice is the conviction that market composition need not and, indeed, should not be happenstance. Market segmentation's underlying premises are that variation among customers are systematic and that correct classification provides guidance to cost-effective marketing that matches customer needs better than generalized approaches, such as purchasing ad space in a magazine. Asking what the demographic readership of the magazine is and matching it to age-of-the-population target increases that age group's chances of seeing and reading the advertisement, thus increasing sales or market share.

For optometrists, this means you should market differently to to someone who's looking for just eye-health services than someone who needs a comprehensive eye-health and visual acuity exam and may require spectacles. For instance, let's say you want to grow the healthcare aspect of your practice. One way you could do this: Spend your advertising dollars on a senior event, such as a local senior olympics, as the propensity of disease in an older population is greater than that of a younger population.

Market segmentation also implies that perhaps the reason those with vision problems don't use your practice's services lies somewhere within the following three reasons:

1. The consumer is unaware of the importance of eye care.
2. The consumer is unaware of the practice.
3. The consumer has "bonded" with another practice.

Market segmentation is a commonplace activity. We all engage in our own classification with a frequency that makes it escape our attention. For instance, we divide our friends between single and married, with children and without (demographic, socioeconomic) and think of the possible activities we might engage in socially, taking those classifications into account. Also, when we buy gifts for friends, we segment by hobbies and interests (attitudinal).

The classification of customers reduces to three basic levels:

1. personal characteristics
2. benefits sought
3. behavioral measures.

Taking Choice modeling and Market segmentation into account in the case of Dr. Partlow, we felt that she could increase her gross by establishing her marketing niche. So, we brainstormed about tactics that would position the practice as a comprehensive eyecare facility with Medicare and make the practice geriatric-friendly to her patient base.

Based on research, we discovered that today's up-scale senior is healthy, very social and enjoys a large discretionary income. Buying patterns suggest this age group is willing to pay for preventative-health measures recommended by a knowledgeable and trusted healthcare provider and is interested in improved acuity. Further, when educated about the advantages of spectacle-lens technology and how it solves an identified problem, this demographic frequently upgrades to premium eye wear and services.

To increase Dr. Partlow's net, we suggested she first terminate an employee. We were not surprised, however, that she did not. (We interviewed all four of her her employees and felt all were willing to invest their energy into personal change and had excellent attitudes.)

Dr. Partlow ultimately invested 12% of her collected gross revenues into these areas for a period of four years:

1. staff/doctor customer service training, upgrade telephone system and telephone shopper training. (Dr. Partlow upgraded to a portable-handset telephone system that could transfer calls to all the places staff tended to congregate. All personnel also attended a two-hour workshop on caller questions and how Medicare worked with secondary insurance as well as co-pays and deductibles.)
2. external face-lift, including external signs
3. Computerization and database marketing to old patient records and assistance with frame selection via the analyzation of sales data to ensure wiser choices in purchasing frames and teaching staff how to effectively merchandise frames.

We next met with Dr. Partlow and her staff off-site for a half-day planning session to increase practice net. At this session, we announced the doctor's commitment to the practice and outlined her financial commitment to improvements. Also, we emphasized to the staff how stressful it would be to computerize and switch to more of a consultative style of product presentation.

The results

Dr. Partlow ultimately decided not to sell. She says she's never been more excited about her practice and that, while her grandchildren are a joy, she thinks she's too young to retire. On the business side, her practice net is up to 30%, and her gross is now $550,000. This increase has taken place over almost six years. Because her business has grown, she is considering hiring an associate so she can enjoy more free time, while still owning and profiting from the practice. This year, we plan to cut back on the number of days she works.

Dr. Partlow also laughingly admits that she now understands her target market better because she realizes they are just like her: intelligent, vibrant and willing to invest in solutions that improve their quality of life. OM

Ms. Blackwell is the president of Blackwell Cnsulting. E-mail her at mblackwell@black wellconsulting.net

Ms. Suter is the president of Suter Consulting Group. E-mail her at suter4pr@donnasuter consulting.com.