You Can’t Cut Your Way To Profitability – Rethink Your Revenue Strategy
by Joni Newkirk, CEO, Integrated Insight
Published April 20, 2020
Some cost cutting is good, especially if it is part of an operational efficiency, continuous improvement effort. But in a downturn, many companies turn to more severe cost cuts to manage cash flows. The risk is cutting costs to the point of sacrificing total revenue and profit margin.
To avoid profit eroding cost cuts, consider these four steps:
Know your target market.
Understand your target market’s value proposition and willingness to pay.
Know your variable operating costs.
Calculate the impact of proposed changes, accounting for both cost savings and reduced revenue.
A recent visit to urgent care was eye opening. We visited late afternoon and I was stunned to find we just made it before closing. Previously, they were open later in the evening. My impression has always been that urgent care typically stayed open when doctors were not, as an alternative to the hospital emergency room. As it turned out, the six facilities for this particular group – all located within 20 minutes of each other – were more likely to mirror primary care practice hours than complement them:
- 2 were opened 8 am to 8 pm, seven days a week
- 2 were opened 7 am to 5 pm weekdays, and 8 am to 5 pm on weekends
- 2 were opened 7 am to 5 pm weekdays, and closed on weekends.
In total, the practice is open 404 hours per week across the six locations.
Looking forward to the need for testing, treatment and vaccines for coronavirus, this urgent care group has a number of options to rethink their operating and pricing strategies to maximize profit.
1. Know your target market.
Knowing your target audience starts with understanding why they chose you versus other options. For urgent care, it may be they do not have a primary care physician. Or perhaps they couldn’t get an appointment with their regular doctor fast enough. Some want to avoid the more costly hospital emergency room. Still others have a difficult time taking off work.
At least two of those reasons speak to evening and weekend operating hours. Being open when your target market wants to do business is critical for higher profits. For this particular practice, converting just one facility to a 24/7 operation could be a strong marketing strategy.
Staggering the hours of the other facilities may also have benefit. The alternative schedule provides more coverage for just two more hours per week. Arguably, it better meets potential client needs. Two facilities are always open in the early morning, and 2 in late evening. If demand warrants more daytime hours, adjust accordingly. But first, let consumers sort where they may. Some may be forced to come during daytime, even though that is not preferred. And even others may not have considered this urgent care practice, but will now.
This is an example schedule that facilities could implement to maximize profit:
- Facility A: 24/7; never closed.
- Facility B: 5 am - 1 pm; 7 days
- Facility C: 11 am - 5 pm; 7 days
- Facility D: 11 am - 5 pm; 7 days
- Facility E: 11 am - 5 pm; 7 days
- Facility F: 4 pm - midnight; 7 days
2. Understand the Value Proposition and Willingness to Pay
Understanding the target market’s value proposition and willingness to pay will also inform pricing strategy. Now may be the time to enter the market for Direct Primary Care (DPC) or Concierge Care. One or two facilities could be converted for a DPC practice. Or, the urgent care practice could provide direct/concierge care as a tele-medicine or at home service.
It is likely many consumers will want to be tested multiple times over the next two years. Many will be lining up for vaccines once available. DPC and Concierge Care patients pay a monthly fee for direct access to a physician, relieving stress and anxiety.
A recent article in Forbes magazine cites the pandemic “…has forced healthcare to evolve more rapidly over the last few months than it has over the past 30 years, in terms of embracing new forms of patient engagement and care delivery.”
As cited in WebMd, more patients are turning to DPC physicians for both convenience and to reduce costs associated with emergency room visits. While health care may just be catching up to other industries that recognize the value of segmenting audiences, the coronavirus wave of need may be just the one to surf into a new business model. It is possible to have both economy prices and higher priced services at the same time. The psychology of pricing is the same either way: know your customer’s value proposition.
3. Know your variable costs.
Knowing your variable operating costs will further inform net income. The urgent care facility will likely pay a premium for a nurse practitioner or physician assistant on night shift. Having physicians on call for tele-medicine visits will also come at a cost. The cost of Covid-19 tests and vaccines will be additional expenses. Accounting for all incremental costs will help inform pricing methods.
Competitive pricing is important, but covering variable costs is a necessity. What is most important is for the urgent care practice to view the business holistically. The goal is not for each facility to turn a profit on their own. Or for each DPC to be profitable on day one.
The ecosystem of “something for everyone” is meant to work in concert. There may be lost leaders and some facilities or DPC doctors will be power horses. But each has a role to play and is integral to the operation as a whole. Providing service where, when and how consumers want to engage is the end game.
4.Calculate the impact.
The final step is calculating the impact of proposed changes. What do you have to believe in terms of additional facility visits? It may not be much given the number of operating hours stayed the same. What should your penetration of the DPC or Concierge care market be? The practice could do a quick research study among consumers in the area, but there is little risk of just trying something new. If the new operating model doesn’t work, the facilities can always revert back. And the urgent care practice may be able to step their way into DPC, scaling up as popularity of the service takes off.
Bottom line, offering less seldom results in growth. More is better, so long as it is taken on with calculated risk. Lead with the consumer and let your strategy evolve to meet their needs.