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Developing sound dental practice strategy: Really understanding your customers & your services

December 1, 2008
by JamesL. Armstrong, BSc, MBA, DMD, FAC D; Anthony E. Boardman, BA, PhD; Aidan R. Vining, LLB, MBA, MP


Dentistry has become increasingly competitive over the last decade. Yet, despite the competitive pressures, dentistry remains an attractive industry and expenditures on dental services have increased substantially. Demand for dentistry can be expected to continue to increase over the next decade as long as patients’ real incomes increase. Being in a growing industry and experiencing increased competition means that business skills and a sound business strategy will be the key to success in the future.

Problematically, dentists find it hard to develop sound strategies. The day-to-day management of a dental practice is difficult enough and consumes approximately one day a week. For most dentists, strategic planning and analysis is a harder exercise. Dentists are well aware of their weaknesses in this area. In a survey of dentists (Medical Practice Monitor by OPEN of American Express), reported in the Winter 2004 issue of Dental Practice Management, the vast majority (96%) agreed that it is vital that dental students learn business skills in dental school.

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Dentists, like other business people, have some control over the future shape of their practice. Thinking carefully about what your practice should look like is the key to higher and sustainable profitability. One approach is to draw upon external consultants. You might think that they are experts in their area. However, many high-priced consultants do little more than offer simple bromides that are supposed to work for everyone. It is, for example, a dangerous myth to presume that dentists can only prosper by offering premium-priced dentistry to the wealthy upper-middle class. In retailing, both Wal-Mart and Cartier are successful, but Wal-Mart is a lot bigger and worth a lot more!

We believe that, with some help, dentists can do strategic analysis themselves. The purpose of this paper is to provide that help. Our suggested approach revolves around five steps: (1) understanding and categorizing your services and customers (patients and agents); (2) putting your services and customers on a practice service-customer matrix (SCM); (3) expanding this matrix to include services provided and customers served by your competitorsyour competitor SCM; (4) understanding your practice’s current positioning strategy in terms of this matrix, and (5) developing a new positioning strategy. The key to better strategy is really understanding the services you provide, the customers you serve and the link between the two, both now and in the future.

Understanding And Categorizing Services

Dentists perform various services for their patients. Each service consists of a single activity or a group of activities. An activity consists of a set of actions that can be logically separated and distinguished from other activities. Typically, a service, such as doing a filling, consists of a series of activities: getting the patient seated, numbing, drilling out the old filling, putting in a new filling, etc.

For strategic purposes, services need to be categorized in a useful way. There are many potential ways to classify dental services:

• ADA Procedure code (e. g., initial exams-ADA 0110, radiographs-0274, amalgams-2160, crowns-2790, root canals-3310) or groups of procedure codes (e. g., preventive, hygiene, amalgam fillings, cosmetic procedures such as bleaching and veneers).

• Quality of the service, e. g., periodontist versus dentist delivery, or auxiliary versus dentist delivery, or gold versus porcelain versus composite versus amalgam.

• Other features of the dental service. For example, the time of day the service is provided (regular hours, early morning, lunch time, evenings or weekends).

• Location, e. g., retail storefront versus professional building, or, more broadly, urban versus rural.

Services can be categorized using more than one of these dimensions. For example, it might be useful to use a combination of production technique, personnel employed and time of service delivery. The potential problem with using more than two categories is that this may result in too many nar rowlydefined services. Judgment is required to decide which categorizations are most useful. The key is to focus on service characteristics that are important to customers and differentiate your practice from other practices.

Services are always changing. Today, some activity might be provided only in conjunction with other activities, that is, as a package. Tomorrow, that activity might be sold separately. When it is sold separately, it is a separate service. For example, a dentist may currently provide home bleaching kits as a component of an in-practice bleaching service. As the kits are not provided separately, it is not a separate service. However, if the dental practice started selling home bleaching kits separately (“unbundled”), then this would be a new service.

Understanding And Categorizing Customers

Like many other business people, dentists tend to underestimate the importance of segmenting their customers. Patients can be usefully segmented on the basis of:

• Demographics (e. g., age, gender, income, first language). Some large cities will have groups of “elite” customers

• Insurance comprehensiveness or type of insurance. Insurance comprehensiveness can be further segmented into various coverage categories (e. g., basic vs. C&B/implants)

• Purchase occasion or knowledge of the benefits of dental treatment — patient dental IQs • Patient status: new patients, regular recalls, or emergency (episodic) patients

• Benefits sought or lifestyle considerations of the patient: cosmetic benefits, pain relief, some balance of performance/price or “cachet” (wanting to go to the same dental practice as the community’s elite)

• Proximity to practice.

Dentists may also fail to recognize that while patients are the end-users of dental services, they are not the only customers. Other potential customers include:

• Physicians and other health-related professionals who refer patients

• Other dentists who refer patients or contract specific services from the practice such as panoramic X-ray services. This is especially important for specialists

• Auxiliary staff of other dentists, physicians or health professionals who refer patients, including receptionists and hygienists

• Insurance companies

• Government (for people in the military, people on welfare, recent immigrants, etc.).

Many of these customers can be thought of as “agents” of patients or as “complementors.” It is in your interest to provide something of value to them as they have direct effects on your business’s sales and profits. Again, it is often useful to segment each of these customer types into groups.

A Practice Service-Customer Matrix

A practice service-customer matrix (SCM) is a matrix with one axis consisting of the services or service groups provided by a practice and the other axis representing the customer segments served by the practice. A simple, illustrative practice SCM is shown in Figure 1. The cells show the percentage of revenues in each service-customer segment. This information can be obtained from the Practice Analysis Module of most computerised dental practice systems. The practice in Figure 1 focuses on preventive hygiene services for recall or referred patients. About 10 percent of the business is for emergency patients requiring fillings (see Figure 1).

The decision about what information to put in the cells depends on the purpose of the practice SCM. For strategic purposes, it is essential to know which services the practice provides to which customer segments; thus, the cell entries may simply indicate the presence or absence of patients in each service-customer segment or one can indicate qualitatively whether segment sales are none, small, medium, or high. Of course, it would be more useful to present segment-specific quantitativ
e information on the number of patients or the percentage of patients relative to the total number of patients, or revenues or percentage of revenues. In an in-depth analysis, it would be useful to have segment-specific data on contribution margins (revenues minus variable costs) or profits. Sometimes, it might be useful to know the names of competing practices.

A practice SCM can clarify which service-customer segments are the most important for a practice in terms of volume of business, revenues, profits, etc. Many dentists are unclear about these fundamental facts at the service-customer segment level of disaggregation. This information is a precursor to deciding which segments the practice should serve as well as how it should compete in each segment. More than one piece of data can be included in each cell, but it is usually better to have separate matrices for different kinds of information. It is important to bear in mind that one can segment services or customers in different ways in different matrices.

Your Competitor SCM

Dental practices compete against other dental practices. It is important to be familiar with your competitors and to know in which segments you compete against them. A competitor SCM serves this purpose.

The easiest way to construct a competitor SCM is to start with the practice SCM (discussed above) and then consider each competitor in turn. Add services or service groups provided by competitors that you do not provide and add customer groups served by competitors you do not serve. Thus, the competitor SCM typically has more rows and more columns than an individual practice SCM. In the process of thinking about your competitors’ services or customers you may realise that their services or customers are slightly different from your services or customers. For example, your practice and a competitor’s practices may both serve patients with the same socio-economic status, but your practice might have predominantly middle-aged patients while the competitor’s practice has predominantly seniors. Such considerations may lead you to more finely tune the service segments or customer segments — another reason why the competitor SCM typically has more rows or columns that the initial practice SCM.

A competitor SCM provides the big picture on your practice’s services and customers relative to competitors’ services and customers. It also provides useful guidance about potential service-customer segments, which we discuss later. An illustrative competitor SCM is presented in Figure 2. Suppose you are practice T: you have a fairly traditional practice that provides four broadly-defined services during regular hours to two broadly-defined customer groups (traditional recalls and referrals, and emergency patients) — the area defined by the shaded box. Practices A and B cater to these segments and also provide cosmetic services to appearance-conscious patients. They also operate only during regular hours, like your practice. In contrast, Practice C provides traditional services to traditional recalls and referrals and emergency patients during regular hours, like your practice, but also provides most of these services in the evening (see Figure 2).

Positioning Strategy

The key to understanding and developing strategy is positioning. There is more to life than just the cosmetic practice. There are five classical positioning strategies: niche strategy, customer-focused strategy, service-focused strategy, hegemony strategy, and mixed strategy. These strategies depend on the services provided and the customer (patient) segments served. Figure 3 illustrates how the scope of services provided and the scope of customer segments served implies a particular positioning strategy. A mixed strategy contains elements of two or more of the other positioning strategies (see Figure 3).

A practice’s current positioning strategy can be identified based on the practice’s existing “coverage” of the competitor SCM. Consider the competitor SCM in Figure 4. Services have been segmented into six categories based on dental procedures and time of delivery. Patients have been segmented into seven categories on the basis of their wealth, the presence of insurance, age and gender.

Wealth, the first criteria for segmenting patients, determines whether patients are price sensitive or not (“elite”). It is not necessary to segment this group on the basis of whether these patients have insurance because they are not price sensitive. Furthermore, it not necessary to subdivide this group on the basis of age or gender because the group has few people and practice specialization on a smaller subgroup is infeasible. For non-elite (price sensitive) patients it is important to know whether or not they have indemnity insurance because patients with indemnity insurance demand more dentistry. Non-elite patients with indemnity insurance can be further segmented into four groups: children, adult females, adult males and seniors.

Different demographic groups generally have different needs and require different services and, when the market is large, a dentist might specialise on a demographic sub-set. For non-elite patients without indemnity insurance, it is important to know whether or not they belong to a managed care plan (see Figure 4).

The cell entries in Figure 4 contain letters corresponding to different competing dental practices. Each practice pursues a different positioning strategy. Practices A and F each follow niche strategies. Practice A focuses on providing cosmetic services to elite patients during regular hours and extended hours while Practice F focuses on providing services during regular hours to price sensitive seniors with indemnity insurance. Practices that pursue customer-focused strategies (sometimes called needs-based positioning) focus on a few groups of customers and offer them the full range of services, such as practices B and D. Practice B focuses on meeting the needs of elite patients and Practice D focuses on meeting the needs of price sensitive, female patients with insurance. Practices that pursue service-focused strategies (sometimes called variety-based positioning) focus on a particular service or group of services and make them available to many customer segments. For example, practice C focuses on cosmetic dentistry. It serves all customer segments, although managed care patients are not encouraged. Stand-alone laser tooth whitening clinics, which are not shown in Figure 4, provide another example of a service-focused strategy.

Hegemony is where a practice offers the compete line of services to the complete spectrum of patients. Practice E pursues a hegemony strategy: it offers all services to all customer groups at all times of the day. No practice in Figure 4 pursues a mixed strategy, but they are common in practice.

Every practice has a positioning strategy. In order to determine your practice’s positioning strategy you first need to construct a competitor SCM like Figure 4. This matrix indicates the set of services provided by your competitors and the set of customers served by your competitors. You should then indicate whether or not your practice operates in each service-customer segment and, if possible, indicate how important this segment is. Preferably, you should enter the percentage of patients in each service-customer segment. The column and row totals help you get a better feel for whether your practice has a customer-focused, a service-focused or another positioning strategy.

Developing A New Positioning Strategy

Positioning strategies may result from a conscious, deliberate, thought-through process or they may result from haphazard, unintended (i. e. “emergent”) decisions. Successful practices decide on a particular positioning strategy in advance — they decide which segments to focus on and which segments to not focus on. Sometimes these are hard choices.

There is no one best strategy. Choice of strategy depends on many factors including rivals, sector trends, prac
tice competencies and personal preferences. In general, successful strategies are unique and are hard to imitate.

While the decision about which segments to focus on depends on many factors, it should always take into account profitability. Key factors that affect profitability include customers’ ability and willingness to pay, customers’ wants, growth, demographics, and other characteristics.

The decision also depends on the characteristics and skills in the practice. Each positioning strategy requires a different set of practice attributes.

Practice A pursues a niche strategy that focuses on providing cosmetic dentistry to elite patients. This generally requires locating in a high-end neighbourhood, a quality external appearance, “cachet”, charming chair-side manner, posh waiting area and operatories, high-tech equipment and/or, perhaps most important, an excellent reputation. The price should be high to signal quality and high desirability, as well as to maximize profit. This type of practice may have few dental assistants but many have other staff who pamper patients.

Practice D pursues a customer-focused strategy centered on adult female patients. This particular positioning strategy generally requires some or all of the following attributes: safe location, safe journey route, convenient parking, female dentists, caring dentists, concerned staff, clean and friendly ambience, technical and professional competence, ease of making appointments and ease of making payments.

Practice C pursues a service-focused strategy centered on cosmetic dentistry. This strategy generally requires some or all of the following attributes: good scheduling management, efficient production techniques (fast hands), easily accessible but not too expensive office, convenient hours, and staff with knowledge about indemnity insurance to minimize patients’ costs.

Practice E pursues a hegemony strategy. This is a difficult strategy to execute well as different practice attributes are usually necessary in different segments. A practice with a set of attributes tailored to one segment does usually not do well when it enters other segments. It is difficult for practices to “hold” different ideas or adopt different ways of doing things concurrently; for example, it is difficult in the same facility to offer services to managed care patients and to provide “elite services” such as cosmetic dentistry. These practices are unlikely to be highly profitable.

More focused competitors can usually out-compete a practice that tries to be all things to all people. One way hegemony might be successful is to have a group arrangement in which different dentists specialise in different areas.

In fact, many practices pursue mixed strategies. They focus somewhat on one or a few groups of customers or on one or a few groups of services, but also compete slightly in other service-customer segments. For example, a practice may concentrate on procedures (endo, or C&B, or implants) or customers (adult, or paediatric, or convenience seeking, or low-income customers) while still delivering other services to other customer segments. These practices are not unique, they do not have a specific set of activities tailored towards specific segments and, therefore, they rarely have a sustainable competitive advantage. For these reasons, they are also not likely to be highly profitable, although they may do reasonably well.

Many dentists are being encouraged to focus on premium-priced, cosmetic procedures. From this article it should be clear that dentists should not think about procedures without also thinking about the customers for the procedures. Clearly, premium-priced cosmetic practices serve only a niche. But, how big is the niche? Is there a sufficient number of proximate wealthy patients? Can the practice meet the needs of these patients? Depending on the location and other characteristics of the practice, such a niche strategy may not be practical or desirable.

Understanding the current positioning strategy is a necessary precursor to subsequent strategic analysis. With this knowledge it is easier to develop an appropriate locational positioning strategy and to develop a complementary set of practice attributes. Dentists should try to avoid the “flavor of the month” business strategies. Switching is expensive.

James L. Armstrong is CEO, Aarm Dental Group and Adjunct Professor, Faculty of Business Administration, Simon Fraser University.

Anthony E. Boardman is Van Dusen Professor of Business Administration Strategy and Business Economics Division, Sauder School of Business, University of British Columbia. Aidan R. Vining is CNABS Professor of Business and Government Relations, Faculty of Business Administration, Simon Fraser University.

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It Is A Dangerous Myth To Presume That Dentists Can Only Prosper By Offering Premium-Priced Dentistry To The Wealthy Upper-Middle Class

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A practice with a set of attributes tailored to one segment does usually not do well when it enters other segments. It is difficult for practices to “hold” different ideas or adopt different ways of doing things concurrently


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