If you’re looking to sell your practice or raise capital, it’s a given that you’ll want as high a valuation as possible. One of the best ways to increase practice valuation is by implementing a successful dental membership plan.
Businesses with subscription revenue are valued up to 8x more than businesses without. If selling your practice is part of your business model or retirement plan, subscription revenue, such as from an in-house membership plan, attracts potential buyers and investors.
Your membership plan can be key to successful negotiations.
Subscription-based businesses provide a number of financial data points and terminology that are music to the ears of financiers. Here are 7 membership plan metrics to include in the process of valuations for your dental practice business.
1. Monthly Recurring Revenue (MRR)
The revenue you receive each month from your membership plan subscriptions.
You can calculate this value per patient, per plan, and for your membership plans overall. If a patient pays annually for their membership plan, you can divide this number by 12 for an estimated monthly recurring revenue.
Monthly recurring revenue from membership plans can often be more consistent and predictable than insurance reimbursements or fee-for-patient visits and collections. That source of recurring revenue can draw the attention of buyers and investors for your business.
2. Annual Recurring Revenue (ARR)
The revenue you receive each year from your membership plan subscriptions.
Just like the monthly number above, you can calculate ARR per patient, per plan, and for plans overall. And if a patient pays monthly for their membership plan, you can multiply that number by 12 for an estimated annual recurring revenue.
Patients can pay for their membership plans monthly or annually. Annual recurring revenue demonstrates similar recurring and predictable revenue for your practice as monthly recurring revenue, but at a different scale and time frame. Annual recurring revenue can be even more eye-catching for investors as they evaluate and estimate your business’s recurring revenue potential in the long term.
3. Renewal Rate
The rate patients renew their membership plan with your practice.
Calculate the total number of membership plan subscriptions renewed in a given period, divided by the total number of patients’ subscriptions due for renewal in the same period.
Strong and steady renewal rates for your membership plan subscriptions indicate consistent recurring revenue that investors and potential buyers love to see in a business.
4. Renewal Margin
The profits driven to your practice by patients participating in your membership plans.
Subtract annual costs associated with these patients and your membership plan from your annual recurring revenue to determine the margin and profitability of your plans each year.
Subscription revenue is important, but profit margins from your subscription-based membership plans will be an even bigger focus for possible buyers and investors of your dental practice.
5. Churn Rate
The number or percentage of patients who terminate their membership plan in a given billing period.
As the inverse of the renewal rate, keeping this number low is valuable for your practice and for interested investors. But a spike in churn rate can also indicate areas that could use additional focus and improvement.
6. Revenue Churn
The percentage of lost revenue from existing subscribers in a given period, or in other words, the financial impact of patients who cancel their membership plan in that time period.
For annual revenue churn, subtract the revenue at the beginning of the year from the total lost revenue due to plan cancellations during that year.
Investors and buyers will want to include revenue churn to discern more accurate calculations of your membership plans’ long-term potential in supporting your business growth.
7. Customer Lifetime Value (CLV)
The estimated total revenue you will potentially generate from a patient throughout the duration of their time with your practice.
Also known as lifetime value (LTV). Your membership plan, particularly with a monthly payment option for patients, means your practice can more likely retain patients for longer. Patient retention extends a patient’s customer lifetime value within your practice – another attractive metric for investors to evaluate.
For more on calculating a patient’s customer lifetime value and translating patient loyalty into patient retention and ROI, click here to download our latest ebook.
Let’s recap these 7 membership plan metrics for dental practice valuations:
- Monthly recurring revenue
- Annual recurring revenue
- Renewal rate
- Renewal margin
- Churn rate
- Revenue churn
- Customer lifetime value
Consider these analytics alongside other key performance indicators (KPIs), such as the market size and growth rate of your patient base (whether covered by your membership plan, insurance, or fee-for-service). These financial differentiators can help you woo and wow potential investors for your business.