Calculating your patient lifetime value
Lifetime value (LV) is a determination of the financial value a patient brings in over their ‘lifetime’ with your practice. The key to understanding LV lies in the recognition that a patient does not represent a single transaction but a relationship that is far more valuable than any one-time exchange.
However, lifetime value is not about any one patient; it is about stepping back and taking a look at your patient base as a whole — understanding that, while some never return and some never leave, on average there is a typical patient lifetime and that lifetime has a specific economic value.
If you don’t know what a patient is worth, you don’t know what you should plan to spend to get one or what you should plan to spend to keep one.
Determining how much the average new patient spends in your practice over the lifetime of the relationship is crucial to running a successful practice because it enables you to make informed, fact-based decisions about your advertising, including how much you should be willing spend to acquire a patient, which approaches are actually paying off, and whether you’re getting the best return on investment (ROI).
One of the biggest mistakes dental practices make when running their practice numbers is looking only at what a new patient spends in the first visit. Why is this wrong? You’ll most likely not do any major treatment on the patient for eighteen to thirty-six months. If you only consider the initial visit, you’re overlooking the important, ongoing production that only comes over time, and this will significantly skew your calculations. Advertising expense has to be viewed against the long-term value of the patient.
Step 1
To begin, you need to think about the average timespan that a patient stays with your practice. For most offices, and given the current economic climate, seven years is a conservative number. I have used this in the sample calculation below. Feel free to use your own number if it differs.
Next, what does the average patient spend over that time period? For the purposes of our sample, we’ll use a low estimate of $500 a year (assuming some restorative work and regular maintenance).
Again, use whatever average number you think is accurate for your practice. $500 is probably on the low side, especially when you factor in whitening, cosmetic treatment, and implants.
Using these numbers, a single patient is worth $3,500 over their life in the practice.
Example Calculation #1
Average years in your practice 7
Average amount spent per year x $500
Value of one patient $3,500
Step 2
After you’ve determined the value of that one patient, there’s a second, more critical part of the calculation (and it’s one that most dentists miss): secondary referrals.
If your team is actively asking for referrals, and providing a good dental experience, a typical new patient is estimated to refer five new patients over the next five years. Write in whatever number of referrals you believe to be true for your practice.
That means, if a new patient spends an average of $3,500 and goes on to refer five additional patients (each spending an average of $3,500), that’s another $17,500.
Example Calculation #2
Value of one patient $3,500
Average number of referrals x 5
Value of one patient $17,500
Step 3
You have to consider income from secondary referrals as part of the value of that first patient. After all, you never would have seen them without the initial advertising that attracted them. Now you need to add it all up. The total lifetime value of this sample patient is $21,000.
Example Calculation #3
Value of one patient $3,500
Production from referrals + $17,500
Value of one patient $21,000
This $21,000 of production for your practice all stems from a single new patient over a seven-year period. This highlights the importance of not only giving your patients continued great services but also how having an ongoing, active, and publicised referral campaign can have a huge impact on your production.