Marketing Spend
If You’re Not Tracking This, It Is Costing You
Here's the scenario we are starting to see often:
Collections are on target. The schedule is booked out for two months. But the bank balance is headed in the wrong direction and cash is weirdly tight. That disconnect is always a red flag.
So we ask one question: what is the practice actually spending and where?
After looking over the budget, we identify the culprit. Marketing spending is way over budget and not just the Google Ads. Everything - agencies, tools, internal marketing, patient referral gifts. We run the math and the Marketing Efficiency Ratio (MER) = Total Marketing Spend ÷ Revenue = 9.8%. We notify the client of this issue, they run it by their marketing team and the response is "Yeah, that's just what it costs to grow."
Maybe. But that's costing you profit and taking money out your pocket as the practice owner. We need ask a follow-up to start identifying a solution: Has that number been going up or down?
We pull the last five years financial and calculate MER: 2.8% → 4.5% → 6.1% → 5.8% → 9.8%
Now the picture changes. You're not "growing." You're becoming more dependent on marketing spending that is not producing equivalent results and every new dollar of revenue is costing more than the last one.
The mental trap is that revenue, in this case, had increased as well so the practice felt the higher marketing spend was justified. Spending is going up, but so is revenue, so the math seems fine. Underneath, though, three things are usually happening at once:
Customer acquisition is getting more expensive.
Profit per patient is shrinking.
Cash flow is tightening.
For this practice that grew from $2 million in collections to $2.1 million over the last two years, the increase in MER meant an additional $89,800 in marketing costs. If you add the costs of labor and supplies related to the $100,000 increase in revenue, the practice profit decreased and the doctor has less money in his account to pay himself even though the practice collections increased.
Most businesses don't have a marketing problem. They have an expense visibility problem. They don't actually know what they're spending, what they're getting, or how it's trending, and without that, it's really easy to confuse growth with success.
Maybe your marketing is on budget and your MER has stayed the same over the past five years, but you may still be feeling the cash flow crunch in this inflationary environment. You can apply the MER concept to other costs in your practice like Dental Supplies or Team Staffing costs. All costs will increase and the goal is to ensure that your revenue increases at higher rate to ensure consistent profitability.