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ALLOCATIONS Powered By Docstoc
                 Brett Gerlach, MBa

             dvertising is expensive, and its benefits are notoriously hard to measure. Is
             your advertising budget appropriate for your practice? Are you spending your
             advertising dollars on the right types of advertising? This article explains how
     to answer these questions definitively and make the adjustments necessary to improve
     advertising returns.

     Key Concepts
     Two concepts form the foundation of a meaningful analysis. The first is the cost of
     acquiring a customer, which is the amount of money spent to find one new customer.
     This cost will be different for each type of advertising. For example, using television
     advertising to attract a new customer might cost more than attracting a new customer
     with an ad in the yellow pages.
        The second concept is the lifetime value of a customer, which is the sum of fees
     paid for all visits a patient makes until he or she stops returning to the practice, minus
     the variable cost of serving that patient. Think of this as the profit added by one more
     customer. Like the cost of acquiring a customer, this value will be different for each
     advertising method because different advertising may attract different types of patients.
     For example, television advertising might be aimed at laser in situ keratomileusis
     (LASIK) candidates, who tend to spend more than patients attracted by yellow pages
     advertising for general ophthalmology services.
        After calculating the cost of acquiring a customer and the lifetime value of a cus-
     tomer for each advertising method, we’ll compare these two values to determine the
     return on investment for each type of advertising. Once this is done, we will compare
     the different advertising methods to identify the best and the worst. This will tell us
     which advertising should be cut and which should be continued or increased.
        Next, we’ll compare the total growth generated by all forms of advertising with the
     total advertising expenditures as a percentage of revenues to determine whether to
     adjust the overall advertising budget. Together, these results provide the information
     needed to make profitable decisions about future advertising allocations.

The Cost of Acquiring a Customer
To determine how much it costs to acquire a new customer, do the following:

   1. Total up the amount of money spent on advertising, by method, for the past
      6 months.
   2. Count the number of new patients generated during the same period for each
      advertising method. These data come from the practice management system.
   3. Adjust the number of new patients to account for missing referral-source data
      (explained below).
   4. Divide the money spent by the adjusted number of new patients generated for
      each advertising type.

   For example, assume our practice uses two forms of advertising: yellow pages
and television. After reviewing the accounting data, we find that during the past 6
months, we spent $8,900 per month on television and $4,000 per month on yellow
pages advertising. For the 6-month period, that’s $53,400 for television and another
$24,000 for yellow pages.

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        A report from our practice management system tells us that there were 50 new
     patients who indicated they heard about our clinic on television and 150 who found
     the clinic in the yellow pages. In addition, 20% of new patients have an unknown
     referral type.
        Assuming our pick list of referral sources is complete, the unknown referral source
     must represent data that were not collected and will include some patients found via
     advertising. Therefore, we will adjust the counts using the following formula:

        Adjusted count = Count/(1 − unknown portion)

        For television, the adjusted count = 50/(1 − 20%) = 62 new patients
        For yellow pages, the adjusted count = 150/(1 − 20%) = 187 new patients

        After this adjustment, we have a reasonable estimate of how many patients would
     have been marked as found by television or yellow pages if all referral-source informa-
     tion had been collected. Without this adjustment, any missing referral-source informa-
     tion would have caused us to undercount new patients generated by advertising.
        We’re now ready to calculate the cost of acquiring a new customer:

        Avoid Common Mistakes
        Capture Referral-Source Information
        You can’t manage what you don’t measure. Without capturing the referral source of
        each new patient, you won’t be able to complete a meaningful analysis. If you aren’t
        collecting these data, begin now—the effort required is very small compared to the value
        of the information. Most practice management systems include a field for recording the
        referral source, so train your staff to ask for it and hold them accountable. Don’t just
        ask for the referring physician; ask patients how they first heard about your practice.
        Did another patient or physician refer them? Did they see your sign while driving by?
        Did they find you on the Internet? Did they see an ad in the yellow pages? This is what
        you need to know.

        Consider Your Ability to Handle More Patients
        This seems obvious, but some practices cannot keep up with demand—and yet they
        spend money on advertising. If your doctors cannot handle more patients, it doesn’t
        make sense to run television ads. Instead, throttle advertising spending back to minimum
        levels to make it easy for patients who come looking for you to find you by maintaining
        a presence on the Internet and in the yellow pages. On the other hand, if you have
        empty slots to fill, it may pay to advertise.

        Follow Up on Existing Patients
        It’s much less expensive to retain an existing patient than it is to attract a new one, so
        don’t let patients fall through the cracks. If a patient fails to respond to a recall notice,
        call that patient and invite him or her to make an appointment. When things are slow,
        have your staff work through patient charts to identify patients who are overdue for
        care and then call them. Software is available that will identify patients who are overdue
        for care and keep track of efforts to contact them, which makes the process easy.1 Even
        if you have to do it manually, it will still be less expensive than advertising in terms of
        dollars spent per visit generated—and you’ll be taking better care of your patients.

        For television: $53,400/62 new patients = $861 per new patient
        For yellow pages: $24,000/187 new patients = $128 per new patient

        This tells us that finding a new customer with television advertising is far more
     expensive than finding a new customer using an ad in the yellow pages. Does that
     mean we should cut television advertising? Not necessarily. First we have to consider
     the value of each type of customer.

     The Lifetime Value of a Customer
     To calculate the lifetime value of a customer, do the following:

        1. Calculate the total revenues received per patient for each referral type.
        2. Adjust this value to account for the expected future revenues for these patients.
        3. Subtract the variable costs of serving these patients.

        The data for the first step must be taken from the practice management system. If
     your system doesn’t provide a report containing this information, you may need to
     ask a consultant with database skills to help you perform a query to obtain the data

Make Appointments, Not Contacts
One administrator recently confided that although the clinic has a wonderful outreach
program to nursing homes in the area, it isn’t converting many leads into patients. The
clinic sends a technician to nursing homes to do a free screening and make specific
recommendations for patients with potential problems to see a physician. She collects
names and addresses and later sends a nice, 4-color packet of material about the clinic,
inviting them to choose it for their eyecare needs.
    The problem is that patients never call back.
    Rather than sending brochures, this technician should offer to schedule appointments
for these people, right on the spot. Although she can’t take scheduling software with her,
she can reserve a set of slots just before her visits, fill these openings, and then return
to the clinic, enter the appointments, and free up any remaining slots.
    When possible, make an appointment rather than simply providing information about
your clinic. Don’t ask patients to consider the merits of your clinic over others—just invite
them to come into the clinic.

Take Good Care of Referring Physicians
Even if your clinic advertises, paid advertising probably produces a lot fewer new patients
than physician referrals. Make sure you take good care of referring physicians by answer-
ing their calls quickly and reliably reporting back to them after seeing their patients. You
should know who your top referring physicians are and let your staff know that if any
of these doctors call, they should make absolutely sure their questions and requests are
quickly and completely answered, even if it means interrupting an examination. Watch
referral counts from these doctors; if you notice a drop in referral rates, give the doctors
a call to find out why they are not referring patients. When new doctors begin referring
patients, call them, thank them for the referrals, and ask them how you can make sure
that referring patients to your clinic is a good experience for them. Invite them to call
you directly if there is ever a problem.
1. gerlach B, Muhlestein T. Recalls, Revisited. Administrative Eyecare 2006; 15(4):19–23

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     from your system. You need the average total payments per patient, for each referral
     type. The results should look something like this:

      Source                        Payments          Patients      Revenue per patient

      Drive-by                       $ 357,058             637             $ 560

      Emergency room                 $ 142,447             659             $ 216

      Employee referral              $ 178,416             281             $ 634

      Insurance company              $ 237,260             587             $ 404

      patient referral               $2,607,954          3,056             $ 853

      physician referral             $4,090,964          5,415             $ 755

      Television                    $ 579,554              422              $1,373

      Unknown                        $5,664,110         8,967              $ 631

      Yellow pages                  $ 280,838              596             $ 471

         This shows us that television revenues are $1,373 per patient, while yellow pages
     revenues are $471 per patient. This total goes back to the beginning of the record for
     this practice management system, which was early 2004, or 3 years ago. This practice
     has been advertising on television and in the yellow pages for that entire time. Televi-
     sion revenues per patient are higher because these ads bring LASIK patients into the
     clinic, which pays more per patient than general ophthalmology patients who find
     the clinic through the yellow pages.
         With 3 years of history, there is no need to adjust these numbers—these results will
     be accurate within about 20% and the alternate method (described next) is likely to
     introduce a larger error. If you have fewer than 3 years of history, estimate the average
     number of years a customer stays with the clinic for each referral type and multiply
     this by the average annual revenue for the same referral type. For new advertising
     methods, choose an existing referral type that will produce the most similar patients
     and use those numbers.
         Next, estimate and subtract the variable costs of serving each patient type. Variable
     costs include only expenses that change when an additional patient is seen, such as
     LASIK royalties, facility fees paid to another institution, physician fees paid per visit,
     and the cost of disposable instruments and drugs. Most of our television patients are
     LASIK patients. Let’s assume the total variable costs of a LASIK surgery average 30% of
     revenues. That leaves $1,373 × (1 − 30%) = $961 returned over the lifetime of a new
     patient found via television advertising. Most yellow pages patients, on the other hand,
     are general ophthalmology patients, and the variable costs of serving them average
     about 15% of revenues, leaving about $471 × (1 − 15%) = $400 per patient.
         We now know that the lifetime value of a customer found via television advertising
     is $961, while the value of a patient found via the yellow pages is about $400.

Compare Acquisition Cost to Lifetime Value
If the lifetime value of a customer is less than the cost of acquiring a customer, you
should cut further advertising. If it’s roughly equal, you should reduce or eliminate
further advertising. If the lifetime value significantly exceeds the cost of acquiring a
customer, you should continue or increase advertising levels. This analysis must be
performed separately for each advertising method.
    In our example, we spend $861 per patient found via television advertising, com-
pared to a value of $961. That’s not a very good return; television advertising appears
to be only marginally profitable.
    On the other hand, yellow pages patients bring a lot less money to the clinic, but
they cost a lot less to acquire. On average, a yellow pages patient brings $400 to the
clinic over a period of 18 to 24 months, after $128 is spent to acquire this patient.
That’s an excellent return.
    We can now conclude that yellow pages advertising should be continued or increased
and television advertising should be reduced or eliminated.

The Big Picture
To determine whether the overall advertising budget should be adjusted, compare total
advertising expenditures as a percentage of revenues to growth in the patient pool
produced by advertising. If advertising is working, growth should exceed advertising
expense as a percentage of revenues by a comfortable margin. If it’s a lot bigger, we
may want to increase our total investment. If it’s about equal or smaller, we will want
to reduce our investment. We must be careful not to put too much weight on this
last analysis because even though the number of patients added to the pool might be
small, it is possible the revenues they generate are far greater (or less) than average.
Therefore, the impact on revenues and profits would be larger (or smaller) than indi-
cated. Nevertheless, this is a useful, convenient measure of overall advertising results
that serves as a second check on the more detailed analysis described above.
    Calculate total expenses on advertising as a percentage of total revenues for the
practice. Assume we spent a total of $77,400 on advertising and had revenues of $1.9
million. Our advertising expenses were $77,400/$1,900,000 = 4.1% of revenues.
    Assume that advertising brought 400 new patients to the clinic in the past year.
Estimate the size of the patient pool by counting the number of patients who visited
the clinic during the past 18 months. (Be sure to count patients, not visits, as some
patients visit more than once.) Assume we have a pool of 8,000 patients. The growth
brought by advertising is 400 new patients/8,000 active patients = 5%. In other words,
we spent 4.1% of revenues to grow the patient pool by 5%. That’s not a very positive
overall result, so we would probably decide to reduce overall advertising expenses by
cutting our least effective advertising (television) for the coming year.

Make sure your advertising dollars are efficiently used by regularly analyzing advertis-
ing returns. The formula for effective advertising is simple: Try a variety of advertising
methods, analyze the results, and then stick with what works and cut what doesn’t.
Results will vary for every practice, so you cannot apply the specific conclusions in
this article to your practice, nor can you assume that what works for others will work
for you.

  Brett Gerlach, MBA, works for Brevium, Inc., South Jordan, Utah. Telephone 801-302-2299;
  e-mail:; web site:

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