Dr. Allen Nazeri (DDS, MBA) explains how dental practices should think about spending to acquire new patients. He defines lifetime value (LTV) — average visits/year × average production/visit × years patient stays — and patient acquisition cost (PAC/CAC) — total marketing expenses divided by new patients. Example LTV: 3 visits/year × $1,000/visit × 10 years = $30,000. Example PAC: $2,300 total marketing producing 23 new bookings → $100 PAC. He shows ROI calculation ((LTV−PAC)/PAC ×100) giving ~299% in the example, and recommends benchmarks: insurance-focused practices spend ~3–5% of revenue on growth; fee-for-service/cosmetic practices may allocate 10–15%. He advises monitoring LTV:PAC quarterly to spot overspending, poor case acceptance, under-investment, or retention issues.
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This is Dr. Alan Naziri, and welcome to another MBA series video lesson. Today our discussion is about how much you should be spending to acquire a new patient. Unless you want to rely only on word of mouth, which is absolutely a slow process to grow a practice, every dentist must spend one way or the other on the cost of acquiring a patient. Now, if you think you're getting patients from insurance companies because you have signed up for them and it's not costing you anything, guess what? The insurance company has already negotiated a fee schedule with you that is typically less than the market rate. So again, you are paying for it at the back end. So how much should you really be spending here? I need to make you familiar with two terminology. One is the lifetime value, or ltv. So what is a lifetime value? Well, lifetime value is an estimated amount of money that a patient spends in a practice over the years they go to that practice.
So how do you calculate the LTV for a patient? Well, if you have one of those practices that you measure everything and you have excellent records and reporting, which I don't see too many of those practices around. But if you do have a practice like that, it's easy for you to go and look at the average number of visits per year. If not, you need to guess what that is. Some practices in the US Or Singapore or other countries where insurance is fairly dominant, you know, they may calculate it based on the number of cleaning or recare appointments that the insurance company covers per year. But let's say whatever that number is, you need to know the average number of visits per year. Now, you also need to know the average production per visit, or at least guess that. Okay? And you also need to estimate the number of years that you think your patients stay with your practice. Now let's look at an example. So in the example, let's say the average number of visits per year is three. So they come and see you three times a year. The average production or the transaction cost at every Visit is about $1,000. And you estimate the number of years that the patients stay with your practice about 10 years.
Or the total is about $30,000. So you multiply the average number of visits by the average production per visit by the estimated number of years you think your patients will stay within your practice. Here it gets a little bit cloudy because of the fact that depending on the age demographics of the people in your practice, the number of years you estimate can may vary. So if you have a practice, let's say, in downtown Manhattan, when there are a lot of business People, and let's say, let's say there are a lot of young people and so forth, or you're in Los Angeles area near Hollywood or whatever. And let's say you have patient based that are like in their 20s and 30s. The chances of them moving is much higher than, let's say if you're in a practice where you have an adult population of 55, 65 plus. Because based on the U.S. census Bureau, you know, somebody who reaches the age of 30, they have at least moved about six times in their lifetime. So you need to kind of take a guess on that and figure that out what that would be for your practice. You can even have two sets of numbers. One for your, you know, more patients that are older and some that are younger. So you have, you come up with two different lifetime value for patients. Now, once you figure out the lifetime value for the patients, there is the second terminology I need you to get familiar with, and that is the PAC or the patient acquisition cost. In other businesses, we call that simply cac, sac, or customer acquisition cost. So let's look at what patient acquisition cost is. Well, patient acquisition cost is the total cost, all marketing activities that results in getting a new patient to book an appointment with you and hopefully pay for that appointment. Now how do you calculate the pack? Well, what you need to do, you need to add up all of your marketing expenses, then divide it by the number of patients booked an appointment. So let's look at an example. Add up all of your marketing expenses. Let's say you spent $300 on Google, $500 on Facebook ads, $500, let's say on prints and flyers or coupons, and $1,000 on seminars, patient educational seminars, and so forth. Okay, so the total is $2,300. Now that could be a monthly expense or it could be a yearly expense. Yearly expense is fairly low, but let's assume that's a monthly expense, $2,300 per month. Now, something you need to pay attention to though, if you're a large group practice or if you have people who are specifically working on marketing. So it's not just you working on the marketing. You do need to add the cost of running that marketing team. So that could be the salaries and the benefits, everything else. So that needs to also be added to the total marketing activity expenses. So you take that 2,300 and you divide it by the number of patients booked an appointment in a month. So if 23 people came from the $2,300 that you spent, guess what you are at $100.
Patient acquisition cost per patient. So we figured out our lifetime value of a patient at $30,000 and our patient acquisition cost as $100. What's important to know is that what is the return on our investment, meaning for every hundred dollars that we spent or to acquire a new patient, how much return we can expect to have. Now most doctors, they calculate this based on the first appointment only. But really you need to look at the lifetime value of each patient. So.
The way to calculate that is, is you take the LTV and you deduct the patient acquisition cost. Okay? So you take the first cost of acquiring a patient from the lifetime value and then you divide that by the patient acquisition cost times 100%. So in our example, you will get 299% return for every hundred dollars that we're spending.
In terms of our return on investment.
So how much should you spend to acquire a new patient?
Really, there are no set rules and it varies based on the practice, business phase, what cycle they're in, your startup phase that you need to add, do lots of marketing and advertising to get people in what market you're in. If you're in downtown Manhattan.
The Google Ads are a lot more expensive than let's say Omaha, Nebraska. The geography, the goals of the practice. Maybe you just added a hygienist or you added a new associate and you need to spend more money on that. However, there are some benchmarking in the industry and all this benchmarking are things typically.
What has been reported from all dentists typically reporting to the Internal Revenue Service regarding how much money they have spent. So the IRS has a benchmarking available. But from experience I can tell you if you have an insurance focused practice, so you get a lot of patients from the insurance company, you, you should be spending at least 3 to 5% of your revenue on growing the practice with new patients other than insurance as well. But if you have no insurance, you have a fully fee for service practice, you have an all cosmetic dentistry practice, you have an all implant practice, you may want to consider allocating 10 to 15%. That's totally up to you. What you like to do, 10 to 15% of your revenue. So if you, if you're, if you're shooting for $100,000 a month in revenue, you should spend anywhere between 10 to $15,000 if you have no insurance in the practice.
Now the number that is very important for me to know is the LTV pack ratio when I work in my clients. So if you remember from our Example we had FIG, our LTV Pact ratio was at 299% for the example that I used. Now what I like to do is look at this every quarter with my clients and see if this number is increasing or decreasing or staying the same. Now if this number is decreasing, let's say from 299, it goes all of a sudden to 180%. Okay? It means two things. Either we're spending too much money on advertising and marketing or we have a problem with case acceptance and case conversion. So that's where I see most of the problem with offices is that they spend the money but they have a hard time converting from inquiries to appointments and and then from appointments at the chair side to a paid treatment plan. Now if that number is significantly increasing over the months, then that means two things. Either the sales team is doing an absolutely great job and we certainly may have a competitive edge or advantage over our competition. That's why we're doing so well. Or it could mean when you evaluate this against number of new patients, if the number of new patients is going down, then it means that not enough money is being spent on marketing. So these ratios are very, very important. Now if the number of stays remains the same, that means that you're basically spending the same amount of money every month to replace the patients. So that means you're not spending enough money on retaining the patients. See, retaining the patients of a practice requires also spending money. So we have to send newsletters out, we have to call them, we have to have a person who can follow up. So this can mean that there is a faulty follow up or a recall system within the practice as well. So again, these ratios, evaluating these ratios over a quarter or two quarter period is very, very important to decide how we can move the practice forward.
With our overall corporate or business Strategy. This is Dr. Alan. Thank you for watching my video lesson on MBA series. If you find value in this program, please share it with others. And if I can help you to develop, scale and exit from your business successfully, please feel free to contact me via email or WhatsApp and I promise you I will get back in touch and we can discuss your particular situation again. Thank you. We'll see you at the next episode.
