By Stewart Gandolf
Chief Executive Officer
Healthcare practitioners ask us about budgeting more than any other single topic
In fact, just this morning a dermatologist asked me how much money he should allocate to market his new dermatology / medi spa practice in Florida.
It turns out there are three primary methodologies to establish a marketing budget.
1. How much ‘ya got?
If you’ve ever met with a media salesperson (or amateur marketer), chances are he or she asked you:
“How much were you looking to spend?”
BUZZZZZ! (Obnoxious buzzer sound effect.)
This is precisely the wrong way to budget.
(I wish you could see the look of disdain on my face right now.)
We aren’t buying a pair of shoes here. Budgeting is a serious business decision with serious consequences.
No one should ever budget by picking some random number out of the air, yet that’s precisely what about 80% of private practitioners and small business owners do.
2. Percentage of sales
On the face of it, percentage of sales seems more scientific. We should base our marketing budget upon our sales volume. As we grow, we can afford more, so we spend more.
BUZZZZZ! (Obnoxious buzzer sound effect.)
Corporate America gave up on percentage of sales back in the 1950s, though it is still taught today by misguided consultants. (Maybe 15% of practices use this method.)
Let’s look a little more deeply.
How much I spend depends on how much I make… which depends on how much I spend… which depends on how much I make.
It’s a paradox. There’s no independent variable.
Besides, there is no one percentage that works in all situations.
For example, if you and a colleague both owned comparably sized practices, under the percentage of sales theory you should both spend exactly the same amount for marketing.
BUT, in keeping with our example, let’s say your colleague practices in a small town, has very little competition and wants to grow by 5% this year. You, on the other hand, practice in an expensive urban area, your marketplace is a competitive bloodbath, and you want to double in size.
Clearly your two situations are very different, and it should be pretty obvious to you by now that your marketing budgets cannot possibly be calculated by the same percentage of sales.
3. By objectives
The correct answer is, you guessed it, to establish your marketing budget by objectives. Here’s how.
(We’ve included numbers for a sample practice at the end of this
We start by determining your conservative 12-month collection trend, assuming you were to do no additional marketing at all. Remember this number should be conservative, and only collections will count (charges are in the Santa Claus category).
You’ll have to estimate where you’d end up if you were to do nothing new. You may stay flat, you could gain some easy “natural growth,” or you might even decline.
Then, you will establish a collections goal, taking into account your capacity, willingness to add capacity if necessary, your lifestyle goals, etc.
Then, subtract your trend from your goal to come up with an incremental collections goal. Remember, this number will be “real growth,” which is harder to achieve than the “natural growth” you have been experiencing until now.
The next step is to determine a return on investment goal (ROI) for your marketing.
When we work with our clients, we help them come up with a reasonable goal, taking into account their relative level of competition, their profession and specialty, whether or not professional referrals are possible, media costs if applicable, the client’s marketing experience, the size of the practice, the number of practitioners and their social skills, etc.
Depending on the circumstances, we usually set a conservative ROI goal. If, for example, your practice were in the 5:1 category, we’d create a marketing plan for you with a goal of bringing in $5 for every new dollar spent on marketing.
Keep in mind that while these numbers are based upon the experience of many, many practices before you, it is impossible to guarantee results, and yours will vary. There is always a bell curve, and some practices will do worse, while others will do much better.
That said you do need to put a stake in the ground based upon experience in order to come up with a reasonable plan of action.
If you are concerned about overhead, remember that in most cases your fixed costs are covered, and variable costs are usually minor, so most of your new revenues will go straight to the bottom line.
Divide the incremental goal by the ROI goal to get a number for new marketing dollars. Add that to whatever you are already committed to marketing-wise (most practitioners have ongoing marketing expenses they are committed to, irrespective of whether or not they are getting results), to calculate your total budget.
The next step is to divide the total budget by 12 to come up with an average monthly budget, though in the real world your budget will be front loaded somewhat, because you will have to get by some creative and other fixed costs in order to get started.
Finally, a reality check. Is the budget too high? If so, go back and reduce the budget, and reduce the goal. Are you willing to invest more? Then you can always go back, increase the budget, and increase your goal.
In our example, our sample practitioner always wanted to break the million-dollar barrier but was stuck at right around $800,000. Using a 4:1 goal, he would invest $50,000 in new dollars, plus his existing miscellaneous expenditures, which works out to about $5,000 a month.
Of course, we are not giving you consulting advice in this article. If you are in the process of budgeting, I highly recommend you call us so we can help you through this highly specific situation and personal process.
And remember, great marketing generates a great ROI, whereas poor marketing generates no ROI.
|Budgeting Worksheet||Sample Practice|
|Collections over the past 12 months||$780,000|
|Baseline: Conservative trend over next 12 months
(assuming no new marketing)
|12 month gross collection goal||$1,000,000|
|Incremental collection goal||$200,000|
|ROI Goal (varies by situation, call us)||4:1|
|New Marketing Investment||$50,000|
|Pre-existing marketing commitments||$10,000|
|Total Marketing Budget||$60,000|
|Average Monthly Marketing Budget||$5,000 per month|