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You may be just starting out, and uncertain what to charge. You might be wondering if you’re charging too much, or not enough because your pricing is different from other practices you know. Or maybe you’re just barely breaking even and unsure whether increasing prices is the right move.
In any case, pricing correctly is important because you need to know whether you’re generating positive cash flow and sustainable profit. Once you have a clearer understanding of whether your pricing adequately covers your costs, you’ll be able to make better decisions for your business and patients.
In this article, I’ll take you through our framework to help you work out if you’re charging enough to cover costs, plus other measures you can take to increase your profitability if raising prices is off the table.
Your key considerations when deciding how much to charge
I recommend that you do not calculate your consultation fee according to what anyone else is charging. The price of your consultations should always be based on the value you provide for your clients.
That said, you need to break down the cost to your practice for a treatment so you can make an informed decision about setting a price for your consultations.
I work with health practitioners across many allied health disciplines and I often see that the practice as a whole is operating at less than 5% net profit before paying tax. For example, wages may be heading towards 50%, support salaries around 15%, and business running costs may be heading towards 35%. When a business runs at these percentages, it’s often the principal practitioner/practice owner who is funding the business out of their own pocket, and making their own effective hourly rate less than the minimum wage!
It’s important that you understand the real costs associated with delivering a consultation so you can be confident that you’re making a net profit, and avoid losing money.
Reverse engineer your prices
So what should you include in your consultation pricing and how does that breakdown? I created this pyramid as a benchmark to guide you through your finances so you can be more confident you’re covering your operational costs.
Here is what you should consider when deciding how much to charge patients for a consultation:
- 40% / Wages including tax and superannuation/pension contribution for you or the team member who conducts the consult. This is your ‘cost of delivery’.
- 13% / Support team - your essential team that does not generate revenue. These are your administrators, receptionists, practice managers, and bookkeepers.
- 7% / Rent
- 20% / Business running costs - these are the necessary costs for running your business. For example, phone, electricity, internet, insurance, practice management software, toilet paper.
- 20% / Net profit - 50% of this should be your cash flow for paying your bills, the other 50% is the profit for reinvesting into your business.
If you’re not charging enough money for your consultations, you’ll be able to pay most of your costs but you won’t have any profit and you’ll struggle with your cash flow.
Set your prices correctly
Increasing prices may not always be the whole solution, though. If your overall practice profit is currently less than 20% of your overall turnover, and particularly if it is less than 10%, you should ask yourself these two questions:
- 1.‘Does my consultation price accurately reflect the value I am providing to clients?’
- 2.‘Am I paying too much for my business running costs?’
If the answer is yes to both of the above, or you’re not sure of the answer for question number two, and you’re still not close to 20% as your net profit, the best way to increase your margin percentage is to reduce the amount you’re spending on business costs. It’s a lot easier to save what you already have than it is to earn more. Let’s look at a quick example to show you what I mean.
If your clinic has a profit margin of 5%, you’d have to generate £2,000 of additional revenue (more patients) just to gain an extra £100 of profit. Or, you could simply save that £100 by shopping around for a better deal on your internet.
See the difference? It’s much easier to save money than it is to make money.
Two simple tips for increasing your profit margin without increasing your pricing
To cut back on your spending, you’ll first want to find out where your money is going. I recommend pulling up your bank statement and going line-by-line asking yourself these two simple, but crucial, questions for every expense on your list.
1Do I need this?
If an item is something that you absolutely must have for your business, then answer ‘yes’ and move on to the next question.
But if it’s not entirely necessary, then take a moment to consider what your day-to-day might be like if you didn’t have that item or service. Do you really need to spend that money? If not, getting rid of it will increase your profit margin.
2Can I get a better deal?
Some things, like rent, loan payments, office supplies, equipment, etc., are must-haves. You can’t run your business without them. For these things, your best bet is to explore ways that you might pay less.
That won’t always be possible, of course, but it’s an idea worth looking into. Can you renegotiate on your rent? Can you refinance your loan? Can you get a better deal on your phone and utilities? Can you get a better rate from your suppliers? Often, it’s just a matter of comparing the going rates for a service, then calling your provider and asking them to match current offers in the market. Sometimes it will involve switching.
Anything you can do will help, because increasing your margin by just a percent or two can make a big difference in the long run.
No matter what you’re able to do now, try to keep these two questions in mind as you move forward. Cut costs when possible and watch your spending, because saving money is the best way to make your practice more profitable without raising prices.
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In 5 years, One Central Health has grown into a team of more than 40 multi-disciplinary staff based across Western Australia—all using Cliniko to work harmoniously so clients can receive the highest standards of care. Read their growth story to learn more about how they did it.