Sales is always among the top five weaknesses reported by hospitals and health systems in our annual Comprehensive National Laboratory Outreach Survey. Why? Because sales is an enigma to hospitals. Sure, hospitals have marketing and communications, but sales? Not really. Sales is a very different skill set than marketing and is only recently gaining importance as health systems consolidate and compete. The converse is true about the laboratory industry. The large national laboratories (Quest Diagnostics and LabCorp) have had experienced, highly skilled, highly trained, and highly compensated “hunters” (sales representatives totally focused on growth) for decades. Most hospital outreach programs have “hybrid” representatives that juggle both sales and service and are not as well trained, compensated, or productive as their for-profit competitors. The difference in results is staggering, especially when viewed on a cumulative basis.
Let’s start with how the business is built from the ground up. Laboratory is the proverbial goose that laid the golden egg for health systems. Each year the number of eggs gets larger and larger because of the power of a recurring revenue model (from maintaining the base business) combined with the growth of new business. Growth can be exponential because of an industry secret called the rule of 78.
Here’s how it works. Each month a new account (golden egg) is added. As long as there is no attrition, the business grows by 78 times the value of the account in the first year. The typical physician office client (internal medicine, family practice, or OB/GYN) averages about $5,500 to $6,000 in revenue per month. The total number of cells in the spreadsheet for one year is 78. Therefore, a quick way to calculate annual sales at various revenue targets is to multiply the average revenue per customer by the number of cells in a year ($5,500 x 78 = $429,000 in annual revenue). Refer to the example below:
The growth compounds over time. The rule for Year 2 is 222 times revenue. For Years 3, 4, and 5 apply the rules of 366, 510, and 654, respectively. Growth builds year over year way beyond what would be expected in a normal business. The same numbers as above extrapolate to $3.6 million in Year 5. The longer the term, the more powerful the impact. This is the secret behind multi-billion dollar companies Quest and LabCorp. They are built on decades of year over year compounding revenues.
Now that we are beginning to get an appreciation for how revenue grows, let’s go back to our example. The rule of 78 example was for one sales representative.
What if you had multiple sales representatives?
What if you also had service representatives that maintained and upgraded the base business at half the new revenue rate of a sales representative?
What if you could attract the best hunters, representatives who could generate (and make) two to three times the revenue of the average representative?
Explore how to build a sales infrastructure based on people, process, and technology to drive exceptional performance for your laboratory in my forthcoming book, The Profit Machine in the Hospital Basement: Turning Your Lab into an Economic Engine.
Kathleen A. Murphy, PhD
Chief Executive Officer
Chi Solutions Inc.