By: Ruth King
Recently I taught my Financial Analysis Trends class (https://keap.page/rk139/cpe-financial-trends.html). During the session, a student asked the question, “What Can You Do If You Can’t Raise Prices?”
He explained that his wife was a speech therapist. Medicare and the insurance companies dictate how much they will pay for each session. So, their revenues per patient are fixed.
Her clinic is in a space that holds five rooms. A speech therapist conducts sessions in each room.
Her revenue per patient is fixed. How does she earn more profit?
The first thought is to increase the number of patients. There is a maximum number of patients that can be seen each month and they are near that maximum. The profit per patient is fixed.
The less obvious answer is to lower her overhead costs.
We calculated her overhead cost per patient given the space she is in and the number of patients that are seen each month. To protect confidentiality, assume the overhead cost is $50 per patient.
The only way to lower overhead costs is to increase the number of rooms that therapists use. This means that the clinic can see more patients and the overhead is spread over more patients. Thus, the overhead would be lower in a larger space.
We assumed a space where there was the capacity for two additional rooms. This dropped the overhead to $40 per patient. She was earning an additional $10 per patient on her bottom line. This also assumes that the capacity for each room remains constant.
So, if you can’t raise prices, you must lower overhead. Usually this is done through profitable expansion where the overhead per patient, or per hour, or per unit of revenue is lower. Larger companies can earn more per unit of revenue because their overhead costs per unit of revenue are lower than smaller companies.
Ruth King is known globally as the “Profitability Master,” and is a a thought leader in entrepreneurship and business. Her books have been recognized as among the greatest in numerous industries. Learn more about all her business activities here.
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