Physical Therapy and the Subscription Economy

If you've been watching your bank account recently, you may have noticed a lot more recurring transactions happening. I sure know I have (though I'm kind of a sucker for subscriptions). To put an eternity's worth of new music on my iPhone, I fork over $9.99 a month for Spotify. For unlimited TV shows and movies, it's another $7.99 for Netflix. I have razors shipped to me every month from Harry's so that I can shave the 1 square inch of my face that isn't covered with a beard, and I get fresh meals delivered to me on occasion from Plated. It seems that as time goes on, subscriptions are becoming more and more a part of what I need to get through most days.

Being the co-founder of a subscription business, I'm also incredibly familiar with what it takes to sell these types of products. Subscriptions can be risky, especially without long term contracts. It's up to you to keep customers happy, and keep them engaged. The second you can't, you've lost them, and your bottom line suffers. Customer retention is the name of the game, and in order to grow your business, you need happy customers raving about you to their friends and colleagues.

Now roll back what I just said. Sound familiar? If you're a PT practice owner, I'm sure it does. Running a physical therapy practice has a heck of a lot in common with running a subscription business. Every time a patient steps into your office, they renew their PT subscription, and It's up to you to make sure they keep coming back.

The PT Business Equation

While there are many different business models in healthcare, in physical therapy, fee-for-service remains the most common method of reimbursement. Because of this, the basic PT business equation is simple:

Top Line Revenue is a product of:

  1. The total number of unique patients treated.
  2. The average number of visits each patient comes in for.
  3. The amount you are reimbursed per visit.

The PT Business Equation
Now take a company like Netflix. Their revenue calculation isn't all that different:

  1. The total number of subscribers.
  2. The average number of months a subscriber maintains their subscription.
  3. The amount they can charge per subscription.

It's the same basic math.

Now I'm in no way trying to say that the two are exactly the same. Netflix never wants their customers to leave whereas in physical therapy, we only want to keep our patients in a given course of care for as long as it's medically necessary. That doesn't mean we shouldn't still be focused on keeping patients from dropping out early, after all we know that roughly 70% of all patients fail to complete their course of care.

The following five metrics are scrutinized in every subscription business, and there is no reason why your physical therapy practice shouldn't be doing the same.

Subscription Metrics for Physical Therapy

We'll be covering each of these metrics in greater depth in upcoming posts. Make sure to check back soon to dive deeper into subscription metrics for physical therapy.

1. Conversion Rate:

We're going to let our good friend Jerry Durham elaborate more on this one for sure, but first, let's provide an overview. Companies like Netflix and Spotify are always obsessing about conversion rates. They want to know for every person who visits their company's signup page, what percentage convert into customers. Why not measure the same thing for your PT practice? For every person who calls to make an appointment, what percentage actually show up? This number can make or break a PT practice. The math is pretty easy.

Initial Evals scheduled / Initial Evals performed.

The biggest issue is that most practices just flat out don't measure it. If you want, you can break this number down even further. How many calls does your front desk take from potential patients, and what percentage of those calls actually become visits? For a clinic looking to increase patient volume, understanding conversion rate is a crucial first step in understanding your practices patient acquisition funnel.

2. Churn Rate:

Churn is when a customer who would have generated additional future revenue for your business stops being a customer. Churn Rate is the amount of customers or revenue lost over a certain amount of time. Churn is the inverse of retention rate, something we talk about quite a bit on this blog. The calculation for PT practices is pretty simple. Subscription companies want to know how many customers are they losing each month because people cancel their subscription. For businesses looking to grow, expanding customer churn can make meeting your growth goals impossible. In PT however, churn is a little bit trickier. We prefer to use the following equation to measure churn rate more accurately in physical therapy:

(Expected Visits - Actual Visits) / Expected Visits * 100 = Churn Rate

The best example of churn in PT is when you think a patient needs 8 visits to reach their recovery goals, and they only show up for 2. In this scenario let's assume their goals weren't met and they never called back (we call this bad churn, more on good churn later). Your practice will only end up collecting 25% of the revenue you anticipated generating for this patient. That's a churn rate of 75%!

Now imagine a less drastic example across your entire patient population. Say that on average each patient ends up coming to 2 fewer visits than you anticipated they would require. If the anticipated visits per patient was 10 and the actual was 8, your clinics churn rate would be 20%. That means every month, 20% of your revenue is being lost due to problems with customer retention. Even decreasing churn rate slightly can have a massive impact on your business's bottom line, making churn perhaps the most critical metric for subscription businesses.

Be careful how you measure churn rate however. Churn is not just your cancel and no-show rate (though high churn rates will certainly have high cancel/no-show rates). It's incredibly easy to skew your churn analysis. This is because in PT, some churn isn't bad. If you get a patient better in 3 visits instead of 8 and they reach their goals, there is absolutely nothing wrong with that. Leverage this outstanding outcome to drive new referrals from your satisfied patient. For more on this, read on to understand your practices viral coefficient. Or click on over here to learn how to leverage customer reviews to grow your practice.

3. Customer Lifetime Value (LTV):

Customer lifetime value is as simple as it sounds: How valuable is your average customer to your business? While each practice likely measures it differently, here is the simplest equation we like using when analyzing LTV.

( PT Revenue + Non-PT Revenue ) / Total Initial Evals

Most practices we meet with these days make money in a number of ways. More and more, secondary revenue streams like fitness screenings, gym programs, and product sales contribute a substantial portion of a clinic's revenue. If your practice works to upsell or cross sell your clients with alternative product lines, make sure to count this in your LTV calculation. If your practice doesn't do these things, don't worry, just take your PT revenue and divide it by your total number of initial evals (also known as unique patients). Take a practice who sees 1000 unique patients per year. Say their total PT and Non-PT revenue is $1.2M. This means the average LTV of one of their customers is $1,200. Easy as pie. While there are more advanced ways to calculate LTV, this is an good place to start.

4. Cost of Customer Acquisition (CAC):

CAC is also just as easy to understand. Quite simply, how much does it cost to acquire a new customer? Add up all of the items you spend money on to acquire new patients. What do you spend on marketing, events, pamphlets, email marketing software, PPC campaigns, etc.? Don't forget to also add in the cost of your time. If you're out meeting with doctors every week, how much is that time worth to you in billable hours? Take that sum and divide again by the total number of initial evals. Now you know what it costs to bring in a new patient to your practice.

Total Acquisition Costs / Total Initial Evals

In physical therapy, most practices are great at keeping this number really low (though if your practice isn't growing, maybe it's too low...). On the other hand, if your customer acquisition cost is high, you could be in for some serious trouble. Look at the ratio of your patients Lifetime Value (LTV) to the Cost of Customer Acquisition (LTV:CAC Ratio). In the world of software, an LTV:CAC ratio > 3:1 is considered good. In physical therapy I believe it should be even higher. We're still working to benchmark the LTV:CAC ratio for PT. If you've got thoughts, let us know in the comments below.

5. Viral Coefficient:

It's not just diseases going viral these days. With the growth in social media and online communication, more and more businesses are being judged in relation to their product's 'virality'. While the term is often overused, at its core is an important metric. Quite simply, a product's viral coefficient is the average number of referrals an existing customer makes multiplied by the conversion rate of those referrals. So for a company like Netflix, if every user shares the product with 4 other friends, and those friends convert on average 50% of the time, Netflix's viral coefficient is 2. To achieve "viral growth" you need a viral coefficient of at least 1. This means that each new customer will on average net you one more customer. It's how companies like Facebook and Twitter grew to billions of users in a matter of years.

While a PT practice isn't looking for a viral coefficient of 1, understanding the impact of your current patients as a tool for generating new patients is critical. Fortunately, if you're tracking the other 4 metrics mentioned in this post, you're well on your way. Here's how we suggest measuring it in PT:

Avg. New Referrals per Patient * Conversion Rate

How do you determine if patients are referring other patients? You ask of course. But be sure to ask in the right way-- questions like "Who can we thank for you coming to our clinic?" It's often important to drill down past just the patient's referring physician. Was it a friend? Family member? Co-worker? Track it. By understanding how your patients drive new referrals, you're better prepared to know exactly what it will take to grow your business. Relying on existing customers to grow your practice can also be an incredibly effective way of decreasing customer acquisition cost, after all, things like social reviews, Twitter mentions, and shares are all press that doesn't cost you a dime.

Okay, how are you hanging in there?

While it may not look like it at first, your PT practice and large subscription businesses like Netflix have quite a bit in common. Try running some of these metrics at your clinic and let us know the results. If we can get enough people together, we'll start putting together a set of best practice benchmarks. Let us know in the comments how you think your practice stacks up. We'll be diving deeper over the coming weeks and providing a number of free tools that will make measuring these metrics a lot easier. Be sure to ask any questions you might have in the comments as well. We'll be sure to answer them in our upcoming posts.

If you're interested in learning how StriveHub can help impact these variables, click below to sign up for a demo:

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Scott Hebert PT, DPT

Physical Therapist, Software Developer, CEO & Founder of Strive Labs, Inc. Lover of Buffalo Chicken Pizza.