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Wednesday
May042011

« Kodak Economic Study Review »

Ed. note: The Kodak economic study projects the calculated effects of fee increases and decreases. It is based on assuming fixed percentages of cost and profit, so it presents a mathematical outcome rather than an accurate economic assessment.

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. Using this 25% profit assumption and the corresponding 75% cost assumption, here’s what the study determined:

• A 3% price decrease requires a 13.6% increase in sales to make the same profit as before the 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 30-35%! Now, let’s reverse the process and compute how an increase in price 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 may lose very few patients.