The Statistics of Lost Cases
I had an interesting discussion with a client practice last week that seems to validate a point I previously made about the relationship between financing terms and case acceptance.
This practice has an office manager who maintains meticulous records when it comes to case acceptance rates. They also utilize a credit scoring system, popular within your profession, that determines financing arrangements offered based on a score of 1 to 7, with “1” representing the highest credit rating, and “7”, the lowest. As you go down the scale, the down-payment requirements increase. This makes perfectly sound financial sense, and I understand the value of using this system for making good business decisions when it comes to extending credit terms.
However, when analyzing lost cases for this practice against the above scale, it was interesting that most of the lost cases (non-starts) for this practice were not 6s and 7s, nor were they 1s and 2s. In fact, over fifty percent of the lost cases for this practice scored either 3 or 4 on the credit scale.
What implications do these statistics have for case acceptance and financing arrangements? I suggest that they are significant.
The people in the above-cited example are not ‘deadbeats’ – those would be the 6s and 7s – as there is a world of difference between willingly not paying one’s financial obligations and struggling proactively to meet them. If we assume that a 3 or 4 credit rating represents the score of an honest, ethical person who has had a period of financial stress in the past, such as the loss of a job, these cases are often good risks, but have a higher level of financial stress than 1s or 2s, and are therefore price-sensitive.
You cannot ignore the ability of these visitors to choose among different practices, and this is a group with whom inflexible financing arrangements will likely eliminate your practice from consideration. A high down payment here will often cost you the case simply because other practices will offer terms that are less painful to the person’s budget. The numbers cited earlier indicate to me that this is a primary case-acceptance issue in your increasingly competitive marketplace.
From what I have seen, it is rare for a practice to have a significant problem with bad debt, irrespective of the financing arrangements. Is it worth losing numerous good cases to maintain as low a bad-debt ratio as possible? In this economy, I suggest not.
My client practice is going to experiment with offering more flexible terms to 3s and 4s, while closely monitoring collections. It will be interesting to see if the benefits outweigh the consequences. My money is on the former.
