Ortho111 #11
Only one CFO I’ve talked with in the past two months knew the lifetime value (LTV) and contribution margin (CM) of their patients.
Just one. It got me thinking.
Independent orthos aspire to sustainable growth. They seek to remain independent, maintain a mission focus, and offer their providers a level of autonomy they wouldn’t get from PE or a health system.
At the same time, competition is heating up as the space booms. Digital MSKs look to disintermediate the patient journey, payors continue to acquire more PCPs and divert traditional referral streams, and consumers have more options for care than ever before.
In response, groups increasingly recognize the size of their funnel is a strategic imperative. By engaging patients earlier in the MSK journey, they can have more control over the decisions patients make.
Therein lies the problem...
I’ve also found most ortho groups are entirely focused on unit-based, lagging indicators.
AAOE's survey of metrics to measure are entirely in the arears.
AAOE’s benchmark revenue metrics focus on lagging indicators
By the time a lagging metric is being reported, it is too late to make a change.
Groups aiming to increase their funnel size and invest in new channels for growth will need to understand their leading indicators.
When a patient journey can take years, understanding leading indicators hold untapped value on how to deploy your resources.
Like you, I need to know what's happening in my business.
If there's one thing SaaS operators are good at it's understanding their metrics. The best founders and executives I know are maniacal in tracking their business and understanding what moves the needle.
I use a variety of dashboards and KPIs to give me the insights I need. By understanding each stage in the customer lifecycle, I can track changes through to the bottom line – determining which initiatives worked and which didn't.
The net effect is knowing the levers that move my business.
As the makeup of ortho growth shifts in the coming years, executives will need richer reporting for what's happening earlier in the funnel to react to market changes quickly and decisively.
Here are the metrics that forward-thinking orthopedic practices are beginning to embrace, which I believe can illuminate the key drivers for your sustainable growth.
Customer Acquisition Cost (CAC)
The total cost of acquiring a new customer, considering all marketing and sales expenses.
Why it’s useful: When you understand how much it costs to get a customer, you know how much you can afford to spend on a given initiative. Sounds obvious. But how many initiatives are burning cash because there's zero insight into if it's working?
Expanding further...
Can you afford to spend $10 or $5,000 to acquire a new patient? If you can turn $5,000 into surgery immediately, it might be worth it. But as we've seen, a surgery-centric "build it and they will come" mindset will eventually succumb to the disruptor that serves the patient at each critical decision point in the journey.
Lifetime Value (LTV) & Year 1 Value (Y1V)
LTV: The total revenue a practice can expect from a single patient over the course of their relationship with the practice.
Y1V: The total revenue generated in the first 12 months of a new patient.
Why it’s useful: LTV helps orthopedic practices understand the long-term financial contribution of each patient, guiding resource allocation and sustainable growth. Y1V helps understand revenue velocity and how much you can expect to receive from a patient in the first 12 months.
Together, these metrics help you determine how long it takes you to monetize growth investments. It also shows you how much additional revenue is outstanding when you subtract this year's new patients Y1V from average LTV.
For a simple example, you acquired 100 new patients this month. Your Y1V is $1,000 and your LTV is $2,500.
You can expect to get $100,000 from those 100 patients over the next 12 months. But if you look back at last year and see you acquired 90 patients in the same time period, you can forecast an additional $135,000 in future quarters (90 patients * ($2500 LTV - $1000 Y1V)).
Customer Payback Period
The length of time it takes for an orthopedic practice to recoup the costs invested in acquiring a new patient.
This metric is calculated by dividing the Customer Acquisition Cost (CAC) by the average revenue generated from a customer (patient or employer) over a certain period, such as monthly, annually, or lifetime.
Why it’s useful: This metric gives you insight on how quickly you'll make your money back and then a ROI positive return on a customer. If it's too long, as in your business cannot support the cash outlay it'd take to get your money back, then you need to abandon that channel or initiative or find a way to make the process more efficient. SaaS businesses without insight into this metric might find themself with a bunch of customers and not enough money to pay the bills.
Expanding further...
Sometimes it can be helpful to think of patients as consumers. In this light, it's helpful to see them as customers that require investment to capture. While you'll likely see a positive ROI of acquiring a customer in a matter of days or months, Employers are a different kind of customer. You don't simply buy one with a Facebook ad click. You identify them as a prospect. You work the deal. You close them. Congrats – You now have the sole right to market to a captive patient audience. Now you engage. You educate. You build a relationship. In a year, two years, three years (because a deal with a customer should be a multi-year investment for you and the employer customer) you've now built an awareness and affinity with a new patient base. They'll choose you. Rinse and repeat for the self-insured employers in your market. That's the story. So an employer customer – how much can you spend to get one? Well, it depends on the payback period.
Growth by channel
The increase in patients or revenue attributed to different marketing or patient acquisition channels.
Why it's useful: Understanding which channels are most effective in driving growth helps you focus on the most productive strategies. Many of the responses I get when I ask about LTV or the value of a patient come back to this metric... "Well, it depends." I couldn't agree more. Where you need to understand the overall average, it is also critical to track each of the above metrics by channel. Understanding your most profitable growth avenues (referrals, traditional marketing, direct-to-employer, marketplaces, etc.) will allow you to invest more heavily into those channels while cutting back on the less-proven ones.
Conclusion:
Each of these metrics is valuable standing alone. But when you understand each of them together, Nirvana takes hold.
Adopting SaaS-inspired metrics aligns nicely with the sustainable growth aspiration. Independent orthos are investing in new capabilities to control more of the patient's MSK journey. Leveling up the measures your team tracks to understand the levers that move your business is key.
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