Industry Fees Reflect Sluggish Economic Recovery
Posted Oct 09, 2012 in LMT Surveys
The majority of respondents to LMT's 2012 Fee Survey are delaying fee increases in the face of price-cutting competition and declining caseloads.
With the country in the midst of what analysts are calling the slowest economic recovery since the Great Depression, laboratory owners say they are holding restoration fees and overall prices show no significant change from two years ago.
In fact, three quarters of respondents to LMT's 2012 Fee Survey have delayed a fee increase due to the economy—28% haven't raised prices since 2009 or earlier—most often citing offshore competition, price-cutting competitors and sluggish workloads. "I'm constantly getting beaten up about price and hear, 'I can get that for $99 elsewhere,'" says a small laboratory owner in Colorado. "And it does seem like my competitors' prices are going down—so I'm just afraid to raise mine."
With fees staying put and expenses skyrocketing, laboratory profitability is inevitably taking a hit. Though a quarter of survey participants say there's been no change over the last two years, half report that profitability has declined by an average of 23%. "We're not only dealing with price-cutting, but payroll, fuel, shipping and alloy and other material costs are increasing while our prices aren't," says a laboratory owner in Iowa. See CLOSE UP: Laboratory Profitability In the Last Two Years.
There's no denying the past few years have taken a toll on our community. Although business was still good in early 2008—and three quarters of laboratory owners were optimistic about the future—workloads began slowing shortly thereafter and the effect on our industry's bottom line is evident when comparing revenues from our 2008 and 2012 Fee Surveys:
-While 27% of labs had sales over half a million dollars in 2007, only 18% of labs reached that milestone in 2011.
-Laboratory owner salaries are lower, too: although 43% made over $80K in 2007, only 30% made that much last year.
But there is good news in some parts of the industry. For example, while fees remain flat in most specialties, implant-related restoration prices are up 5% in the last two years. This makes sense given that implant restorations have held their own during the past couple of years; just last spring, three-quarters of laboratory owners told LMT that the economy had not adversely affected their implant business.
"I've always felt demographics is one of the major reasons for the ongoing success of implant restorations. The largest bubble in the boomer generation is right at the age where we see folks who need or want implants. And these just so happen to be the folks with higher disposable incomes," says Jimmy Stegall, Vice President, Lab Operations, Sherer Dental Lab, Rock Hill, SC, where annual implant sales have increased 40% since 2010.
There's been a similar increase in the orthodontic sector where fees have risen a healthy 8% since 2010. In fact, two-thirds of orthodontic laboratories say they've raised prices an average of 5% just within the last year. This is likely because offshore outsourcing is not prevalent in orthodontics and many orthodontic patients are children; parents who may put off their own restorative work hesitate to do the same when it comes to their kids.
More good news is that—despite the industry-wide proclivity to hold prices during the economic recovery—nearly one quarter of all respondents did raise prices at the beginning of this year. "I've delayed in the past and it's hard to recover; our materials, labor and other costs increase each year, so it's warranted," says one laboratory owner. "A moderate increase each year is less shocking than a major increase every few years."
Of those laboratories that have recently raised fees, there's a common refrain: we cannot consider price cutters. "Labs in our area have been under-cutting each other's prices to the point where one is now 70%—yes, 70%—less expensive than us. We talked about that before we raised our fees this last time but decided to ignore them and price our work based on business fundamentals," says Don Inman, CDT, President, Inman Orthodontics, Coral Springs, FL. "My feeling is in the long run my discounting competitors will more or less put themselves out of business because they'll have no profits to invest in technology or they'll work their employees to death."
Laboratory owners are also making other kinds of adjustments to their fee structures to be more competitive in this market. For example, 48% now offer volume discounts, up 18% in just four years.
One laboratory in the Mid-Atlantic credits customers' statements at the beginning of each month based on the volume of the previous month's sales. Qualifying customers must do at least $2,000 a month, have few remakes, pay on time and, in order to keep receiving the discount, maintain their monthly sales average.
"I've been offering these volume discounts in the form of credits—anywhere from 3% to 7%—for the last year and it's been a great incentive to those who may have been sending work to other laboratories," says the laboratory owner respondent.
While rising gold prices have convinced some survey participants to incorporate alloy surcharges, others are trying to simplify pricing with flat rates for certain restorations. "I hate nickel-and-diming my accounts. I know some labs charge separately for models, dies, articulations, alloys, etc. but to me that's like buying a pair of pants and having to pay separately for the pockets, belt loops, zipper and cuffs," says Paul Gerhard, Owner, Gerhard's Dental Lab, Dunedin, FL, who offers flat-rate C&B restorations.
"Since I only use high noble, I did have to switch to an alloy with a lower gold content. My overhead is up slightly but I'm still profitable and my customers appreciate the straightforward pricing," he says.
Bundled pricing is also becoming more prevalent in the implant arena, since it allows labs to give clients an upfront price that includes not only the restoration, but also abutments and components. "Due to different brands and price fluctuations, our bottom-line fee for an implant-supported crown was varying as much as $150 from case to case," says David Weber, CDT, Sun Dental Lab, Medford, OR. "By 'averaging' our fee, our clients know exactly how much their lab costs will be and their profit is predictable and assured. It's a win/win and further 'marries' our customer base to us."
Although recovery has been slow, many laboratory owners and managers are taking proactive measures that have allowed them to protect profitability and hold on to their share of the market during the last few years.
Good, old-fashioned belt-tightening—cutting expenses and emphasizing efficiency--is what's been helping many respondents persevere and maybe even prosper during the last few years.
For example, Legacy Dental Lab in Rochester, NY, moved last year to a less expensive location to reduce overhead. The laboratory has also implemented a number of Lean Manufacturing principles to eliminate waste; re-evaluated its inventory procedures; and shopped around for less expensive phone, internet and energy providers.
As a result, overall profitability has increased 15% over the last two years. "We're addressing lab costs the same way we manage our personal household budget: minimize expense, maximize income and re-invest a percentage of profit," says Manager Marty York, CDT.
One-on-one interaction is a higher priority than ever before now that the economy has exacerbated the price-cutting phenomenon. To enhance customer relationships, respondents are offering more client education, joining study clubs and finding opportunities just to get more "face time" with their dentists.
"When you're willing to take time out of your day to go into their offices and help with difficult patients or technique-sensitive procedures, it adds tremendous value to the relationship," says Tom Wiand, CDT, Owner, Wiand Dental Laboratory, Scottsdale, AZ. "In the past, our goal was to make the best prosthetics we could. In today's world, it takes more than that."
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