Good advertising works on ALL of us. In the best cases, they entice you to patronize their business to fulfill your needs — a win-win situation.
Any smart business owner will put effort into drawing in hungry clients, whether they’re hungry for a burger or a dental cleaning.
A smart owner will also be smart about their advertising. They know that if they throw every dollar they have at every advertising tactic under the sun, their ROI will not have strong yields.
That’s all great, but if you’re looking at buying a practice, why should you care about their advertising budget? Because like every other number you’ll look at, this one can tell a story — if you know what to look for.
Are they overspending on ads? Under-spending? Are they using their advertising budget effectively and efficiently? What might you need to change?
As always, start with knowing your numbers. A practice will generally spend up to 4% of collections towards advertising efforts. That being said, anything higher than 2.5% is considered aggressive. If it’s well-spent, 2.5% is enough to see strong advertising results; anything higher than that can be considered “gimmicky” or ineffective.
Say you’re looking at Dr. Jones’ office to purchase. You see that Dr. Jones is spending about 5% on advertising. Okay, that’s a little high, but is it at least producing results? How can you even tell if you’re not the one making these decisions and seeing the results?
Look at the new patient flow.
Dr. Jones is seeing about 6 new patients a month on average. Well, that’s more than one a week sometimes so that’s not so bad, right?
The minimum benchmark for strong new patient flow is 15 per month. Dr. Jones is paying double for advertising and he’s not even getting his money’s worth.
Ask Dr. Jones what it is he’s doing to advertise (in a polite way). Ask him, “Dr. Jones, I see you’re spending about 5% on advertising. What methods are you currently using? I’d love to learn for when I become an owner.”
Dr. Jones spends 5% towards advertising. Dr Jones advertises primarily in the grocery store ads that nobody reads. Don’t be like Dr. Jones. Don’t waste money on advertising that’s ineffective.
Now I really want you to keep in mind that there is a chance that Dr. Jones is really only using 1.5% of his advertising budget towards the grocery store ads. What makes up the remaining 3.5% then?
Very often, we see doctors putting personal expenses like Costco memberships, residential gardeners, home renovation expenses, etc. as business expenses. When this is done, it’s very common for bookkeepers to throw these personal expenses into the “Advertising/Promotion” category.
Before you immediately assume Dr. Jones is bad at marketing, just ask. Double check before you pass a final judgment.
Doctors can often be surreptitious about these questions. Let Dr. Jones know that you’re not there to judge their bookkeeping, but that you just want to get a solid understanding of the practice so you can best understand the profitability and be fair to all parties involved.
After all, cutting out those “personal expenses” will ultimately lead to a lower overhead of the office which means a more profitable investment for you and a better offer made to the seller.
See? There’s that win-win thing again.