ROI: Getting It RIght

ROI: WHAT YOU NEED TO KNOW

What's it going to cost? Is it worth it?

These are questions at the heart of so many of the choices we make every day. From that latte on the way into the office to that family vacation, virtually every financial decision comes down to some consideration of costs and rewards.

This is especially true when it comes to investments in your aesthetics practice. And while no reasonably successful physician owner makes major purchase decisions without some due diligence, the harsh reality is that sometimes even the best intentioned decision makers have invested (perhaps heavily) in products or services that simply did not deliver. Did they fail to assess the Return on Investment (ROI) or did they just fail to do it right?

Experts from across the aesthetics industry spoke with Modern Aesthetics® magazine about ROI calculations—and how to get the most from them.

ROI in Perspective

The point of an ROI estimation is to give context to a potential investment. But at the end of the day, the whole notion of ROI calculation itself may be taken out of context. Despite its foundational status, the concept is actually somewhat poorly defined. There is no hard-and-fast method to calculate ROI.

Practice management and marketing consultant Wendy Lewis explains. “ROI can be calculated in more than just a percentage gain or in terms of dollars and cents. ROI calculation can be tweaked for different applications. If you think of ROI in the broadest of terms, it's a measure of what you get back compared to what you put in.”

“ROI has different meanings to different people,” says Kevin Smith, a practice consultant and Associate Vice President, Allergan Practice Consultants. “You have return on your assets. You have return on capital. You have a return on your infrastructure investment.” The shape of the calculation depends on what is truly being assessed, he suggests. “Are we looking at profitability of the practice or are we looking at my investment into the practice? Does that include real estate? Does that include equipment? Does that include products? All of your fixed assets, variable assets, employees?”

Mr. Smith emphasizes the “Big Picture” consideration of practice financial health. “When we look at the financial analysis of a practice, we're actually looking at the profitability. We're looking at the top line revenue, the expenses paid—and the expenses would include both fixed and variable expenses—your cost of goods sold, your payment of your labor costs of both staff and providers. And then as an owner, that's your true return. That comes back to you either in a paycheck, if you're in a partnership, K1, or you're reinvesting that money into the corporation.”

“In many ways, ROI is really the only deciding factor,” says Beverly Hills plastic surgeon Nima Naghshineh, MD. “There are so many components of determining your ROI on a machine that saying it's the only deciding factor doesn't really do it justice,” Dr. Naghshineh says. He notes some of the many factors that might be considered. “You have to consider the current state of your market and your practice's role in that market, what current revenues and volumes you have in your practice, and what type of treatments you're doing. All those things go into—at the very least—getting an understanding of the utility of a device and therefore, they're also part of the calculation of an ROI.”

Charlotte, NC-based plastic surgeon Peter Capizzi, MD takes a similar stance but with a different conclusion. “The most important part of thinking about a procedure or technique or product to bring into your practice is One: Does it work? Two: How does this fit into my practice? Then, how can I make it easy for my staff to deliver this, and implement it?” he says, cautioning that implementation is usually harder than the actual purchase.

Yet, demonstrating how practices approach ROI differently, Dr. Capizzi concludes that ROI may not be “the premiere part of the equation.” He emphasizes that aesthetics practice is a business. “Sure we want to make a profit, but we're not charging a thousand percent mark-up. You know, 15, 20 percent mark-up, 50 percent mark-up on products. It's all within reason,” he stresses. Strictly speaking, a discussion of ROI could skew consideration to emphasize the greatest profit possible. 

“We determine the acquisition and integration of new devices based on two primary criteria. First, we are constantly evaluating emerging technology that provide measurable, sustainable, and consistent results. The results from these devices must demonstrate significant improvements over those already being experienced by our patients,” says Kenrick Spence, MD, Medical Director and Chief Plastic Surgeon at Hillcrest Plastic Surgery in Orlando, FL. “Secondly, since  the decision for integration of new devices is also stimulated by changing trends and interests in our consumer base, our inquiry process is designed to track these trends.

“ROI is quite important, as a practice must remain profitable in order to continue to service its patients. Staff need to be remunerated at comparable market rates to be  attracted and retained,” Dr. Spence adds. “However, before a device is acquired, the market it will serve is carefully evaluated from a number of perspectives to ensure that a strong demand exists and the price point for the service successfully determined.”

Nashville oculoplastic surgeon Brian Biesman, MD makes a point echoed by the experts we spoke with. “I think that we need to do what's best for our patients and what we believe to be best for our patients. If there's a favorable ROI component to that, that's great. But I'm not going to choose products or not choose products if I don't feel it's in my patients' best interest.

“If there's an ROI factor to be aware of, that's fine, but at the end of the day, our decision making should be based on what's best for our patients not what's best for our ROI.”

Assessing Opportunities

Some practices look at ROI in the most basic terms, Mr. Smith says. In the case of an energy-based device, one might look to the device cost or lease payment as a fixed cost ($X). If you charge $Y for each procedure, how many procedures must you perform before you break even? There follows a question of timing. What is an acceptable timeline to break even by these metrics? One year? Three years? Five years?

“To calculate ROI, you have to consider more than just the price of the capital equipment and any per-treatment consumables,” Ms. Lewis advises. “There are additional considerations including doctor and staff time pre-, during, and post-procedure; how long a procedure ties up a treatment room; and all the disposables used (gowns, slippers, sheets, local anesthetic, dressings, etc). As an example, the ROI for a treatment that ties up a room for 45 minutes and requires a physician extender to stay with the patient may be lower than a treatment that is hands-free and ties up a room for 25 minutes. The biggest mistakes we see are failing to properly calculate provider time and marketing expenses into total ROI.”

Dr. Naghshineh proposes several key questions that should guide decisions about new equipment, products, or services:

• Is it going to cannibalize another thing that I already have?

• Is it a marked improvement to what I already have?

• Is there a consumable?

• How much is that consumable?

• Is the system reliable?

• What do colleagues say about the device?

• How much space does it occupy?

• How much inventory is it going to require?

• What would needed service entail? Who provides it?

Instead of focusing on ROI, Mr. Smith prefers to think in terms of a break-even analysis. Like ROI, it can be an amorphous concept, although it tends to reflect a more comprehensive consideration of the costs associated with a purchase.

“If I was doing the analysis, I would take into account everything that goes into turning that machine on: the labor component, the consumable component, all of the variable expenses that are attributed to that piece of equipment,” he says. “You would take that into account along with the payment or the capital expenditure.

“Where my expense line and revenue line merge, that's the break even point. I've paid off the equipment. I have my variable expenses covered, and above that I will have a profit margin or a return on that investment that flows back to the practice or to the provider.”

Mr. Smith also addresses the notion of “opportunity cost.” If you bring in something new, what are you giving up? “You have to take that into consideration. Are you taking patients/consumers from another procedure or machine or device within your practice and converting them over to the newest one? Does that make sense? Where you practice, are the demographics right for that piece of equipment? And then what do you have to do to attract the patients to utilize the new device or procedure?” he notes. He also advises considering the marketing spend required and its potential benefit.

“A lot of times, the latest and the greatest is presented in a society meeting, and the physicians just get caught up in the hype without doing their research and analysis before purchasing the equipment,” Mr. Smith warns.

Ms. Lewis says it's also important to consider opportunity costs when considering ROI. She points to the example of a fat reducing/body sculpting system, which you may feel compelled to bring into the practice to stem a loss of patients to competitors who offer the same or similar procedure. “Even if it may not be the most profitable procedure offered in the practice, there is additional ROI from not losing patients and keeping them in the practice, so it still goes to your bottom line,” she explains.

“Another example is when a practice or medspa offers a reputable financing program for patients to make payments over time. The ROI may be calculated by how many new treatments you sell over the relatively small fees deducted by the finance company.”

At the same time, incremental revenue likely should not be part of an ROI calculation. Sure, patients who undergo microneedling may be prime for skincare product sales, or you may anticipate the device operator upselling body sculpting patients on injectable procedures, but there are no guarantees.

“I would just look at the device,” Mr. Smith advises. “I know you have procedures or products that when patients come in, they're exposed to other procedures or service offerings. I don't know how much weight I would put into that. There's data out there that would show if you do X procedure, let's say about a third of those patients go on to get something else.” Additional revenue bears consideration, he says, “But to do a hard analysis, I would not use those subjective criteria.”

Tracking Demand

The experts we spoke with all addressed the notion of a “good fit” and understanding existing versus potential patient demand as essential to assessing opportunities. But how does a practice do that?

“Number one, if you're on our website, if you want to inquire about any procedure, there's a dropdown so we can track interest,” Dr. Capizzi explains. “If you come in the door at your first consult appointment, you're going to get two sheets. One will be a demographic short questionnaire, and then you'll get a sheet that asks, while you're in your consult, if you are interested in any of these other items, or have any of these concerns. And if you circle them, they'll come up in your consult.”

Not only does the form allow for tracking interest, it also makes it easier to bring up available treatments. “A lot of times I'll have people circle the obvious, like Botox, fillers, but sometimes they circle the less common concerns, like like stress incontinence or leaky bladder. And then I'll know to talk to them; it's easy to bring up a procedure. So even if it's not the initial consult, you can bring it up and not feel like you're probing.”

Dr. Naghshineh recommends thinking in terms of core services, especially for new practices that may lack historical data or an established base. “If you're just starting out, there's a core set of services that you're going to offer potential customers. It doesn't matter if you're a surgeon and those services are surgical or if you're a dermatologist and they are nonsurgical, minimally invasive. But you need to understand your fundamental offerings, and this is really typically just a self-assessment.”

A brand new practice needs to decide, “What are the core services that I want to offer my patients?” Dr. Naghshineh advises. “Oftentimes it's not realistic and practical to try to offer every single service that you could to all your patients, because in order to do that, you need a certain number of devices and instruments and the cost to get all that is unreasonably high for somebody who doesn't have a lot of revenue being generated just starting out.”

Established practices may not have ready access to key data, either. “A lot of times practices don't keep a running tally or track the numbers that could help them expand. They're just looking at what they're already doing,” Dr. Naghshineh says. He encourages practices to solicit feedback. “When your practitioner has a relationship with patients, then they are just talking to patients during their treatments, trying to get a sense of what the buzz is out in the community and what patients typically are asking for that you're able to provide.”

Consider the example of laser hair removal. “If you're having a lot of patients coming in asking for laser hair removal and you just don't offer that, that may be the next best thing for you and it's a good starting point for your ROI,” Dr. Naghshineh suggests.

“Where the ROI calculation or consideration starts is not in the numbers. It's in really listening to your patients and listening to your market and getting feedback from your patients and saying, ‘It looks like the next thing that I need to consider is X,'” he says. “Whether it's laser hair removal, skin tightening, whatever it is. Then that should trigger you to look deeper into your numbers.”

An established practice that lacks good numbers should hit pause, Dr. Naghshineh suggests. “They should start measuring their internal metrics accurately so that they can start making better business decisions. I'm not just talking about or considering devices, but you need to have good metrics to understand that your marketing is working right and you're making the right decisions for your practice.”

It can help to track offerings of local competitors, but this is not a primary or even necessary consideration, experts suggest. “You have to be aware of it,” Dr. Capizzi says, “but don't be obsessive about it. Focus on your mission. We're trying to deliver on our mission to help our patients to be their best self. So we look to the tools and services to do that.”

Other Data Points

Your practice will be a resource for valuable data to consider when assessing ROI and aesthetic opportunities, but other sources warrant consideration. The company selling the device or product under consideration should be willing and able to provide data.

“I do believe most manufacturers have the data. They've done the research and are capturing the procedures out there and utilization, demographic data. They're doing it on a national basis, and they have data,” Mr. Smith says. However, that data may not be fully applicable to any given practice.

“I would take that data and then look at my own location, my practice, my demographics, my cash flow,” he explains. Mine the internet for data, too. Just know your sources, Mr. Smith advises. “I would ask physicians to get references from peers that are doing the procedures that own the device and see what they're saying. They're going to give you the real feedback.”

Dr. Capizzi concurs. “You have to do both,” he says. “Plastic surgery is a small specialty. So a lot of us know each other. You can also go to the rep side—being the link to the company. If you have experience with that rep and you've know him for several years and you like him and you trust him, then that word means a little bit more than someone who's brand new, who's trying to sell you a device. I can think of one case where I actually trusted the rep more than the one colleague that had this device.”

Visiting another practice can be helpful, Dr. Capizzi offers. “I like to see how a machine works. It is easy to use? Can I delegate that? If I can delegate it, that's helpful. And what do the staff think about it? How's the patient reaction when you're doing the treatment? Those are things that  are helping make decisions about certain devices over time.”

Where do margins fit in? Margins determine how quickly you realize a return on your investment, Dr. Naghshineh reminds. “If the cost of the device is not very high and your per treatment treatment charge is high, and therefore the margin is high, you're going to have a much faster ROI, versus a device that requires a large volume of patients and the per treatment cost is not very high. That's going to take you longer to get your ROI on that.”

These variables are all interrelated. As the cost of the device goes down and the volume and cost for procedures rise, the profitability increases. And, Dr. Naghshineh points out, there are some relatively low-cost devices that are used for comparatively high-priced services. “Margins are perhaps the most important thing to consider, especially when you're starting out, because the last thing you want to do is dig yourself a big financial hole and try to claw your way out of that.”

What About Skincare?

Though far less financially risky relative to a new device, the decision to dispense skincare brings key economic considerations for a practice. These warrant consideration, Dr. Biesman acknowledges, but ROI is not his primary concern.

“I think the key to successful longevity to help patients look their best over an extended period of time involves a combination approach, which typically involves topicals—which obviously are at home, technology-based treatments with skin tightening or treatment of dyschromia or erythema, some superficial resurfacing or chemical peel or more aggressive depending on the individual, and injectables. We try to put people on an annual type of plan that's tailored for them, that will help address their needs,” Dr. Biesman says. “But every single member of my staff and I feel that skincare and home-use products are a critical part of maintaining your best overall appearance. If you're going to invest in some of these procedures, maintaining your outcomes is really very important.”

“I believe that skincare lines can be profitable. If it is set up properly within the practice, it can be a source of revenue—ongoing revenue—and a profit stream for the practice,” Mr. Smith says. “I recommend that practices limit the number or SKUs or companies that they represent. If you have five, 10, 15 different companies and five cleansers and 10 different eye creams, you just confuse your patients. You have to educate your staff. So you have to narrow that down to probably three product lines with niche products in a couple of the product lines, and you need to train and educate your staff and they need to be conversant.

“They need to be good medical-grade products,” Mr. Smith emphasizes. “Yes, there's going to be new and novel, and here's the latest and greatest, but does it fit your office? Is it going to confuse your patients? Is it going to confuse your staff? Where does it fit with the current offers that you have?”

Dr. Biesman notes that data are forthcoming from a study he did that demonstrate a substantial benefit for combining skincare with device-based procedures.

“Can skincare sales have a favorable impact on your ROI? Yes, it certainly can. Especially if you use online programs that, as opposed to just being an online store, keep track of what products the patients have received,” Dr. Biesman says. These programs can alert the office when patients haven't re-ordered for a set period of time. There are also options for automatic shipment so patients aren't forced to remember to re-order as their product runs out. “They can opt out of it, but it's a way to try to ensure that patients continue to use their home use products,” Dr. Biesman says.

The online store itself may benefit the practice's bottom line. It reduces the need for on-site inventory and thus frees up cash flow. “We still need to have inventory because people who are here like to walk away with a bag full of stuff, not with a promise that they'll get a delivery at home in a few days. They want a bag of something.”

But Dr. Biesman doesn't use the system primarily for a positive ROI. “We're doing it because we feel that it's really in the patients' best interest and the fact that it helps ROI, great. But the fact that you can do it mail order, you get tracking of what patients are using, make sure they're using things correctly.”

By protecting the patients' investment and optimizing outcomes, there may be indirect ROI benefits of skincare, Dr. Biesman suggests. “At the end of the day, it's to enhance outcomes and maintenance of outcomes over the long term, and even prevention.”

Success with skincare dispensing requires a commitment. “There's a thousand different skincare products. Study a line, pick at least two lines so you have an alternative,” suggests Dr. Capizzi. “Emphasize those two lines. Learn everything.”

It's important to take the time to educate and empower staff. “If the staff understands it, and year after year get to know those products better and better and better, and use them over and over and over, then they're experts in it. And you know what? Our staff is never leaving because we don't have the ‘newest' skincare products,” Dr. Capizzi says.

The Bottom Line

Whatever your approach—ROI, Breakeven Analysis—the key is that you understand costs, revenues, and profitability and are able to weigh these agains the most essential consideration: the best care of patients.

By and large, hard data are the most reliable tools around, but be warned that even these can fail. The only guarantee is that there are no guarantees. Even that can have it's upsides. “There have been times when I've said, ‘This does not look good. I don't know if I would do that.' But that decision is up to the practitioner. You have to do your analysis, but sometimes that intuition and entrepreneurship kicks in,” Mr. Smith says.

“I've been proven wrong over the years,” he adds. “I've had doctors come back to me and, ‘See, Kev. This is what happened. Thanks for your advice. I take it sometimes, and other times I just have to look into my intuition and what I believe is going to happen.'”