Do you really know the incremental cost of your next sale ?

We always assume that the next new sale is good business. More sales, more profit. But not all sales are equal. Do you really know the incremental cost of your next sale ?

An Illustrative Story

In the bustling city of OrthoVille, a pioneering medical device company known as OrthoTech Innovations was leading the way in cutting-edge innovations for orthopedic surgery. They had developed a groundbreaking implantable device called the “BoneGuard Pro,” designed to revolutionize patient care and outcomes in orthopedics. This device exemplified OrthoTech Innovations’ current business model.

One sunny morning, Dr. Emily Johnson, a renowned orthopedic surgeon specializing in joint replacements, received an intriguing email from OrthoTech Innovations. The email introduced the company’s latest innovation, the “BoneGuard Pro Plus,” an advanced version of their existing device. It promised enhanced features and capabilities that could potentially improve surgical precision and patient recovery. Dr. Johnson was excited about the possibilities and decided to explore this new technology further.

OrthoTech Innovations promptly assigned one of their representatives, Michael Reynolds, to meet with Dr. Johnson and discuss the BoneGuard Pro Plus. The meeting was a resounding success, as Dr. Johnson was impressed by the device’s potential benefits and Mr. Reynolds’ in-depth knowledge. After extensive discussions, Dr. Johnson made the decision to incorporate the BoneGuard Pro Plus into her upcoming joint replacement surgeries.

Now, let’s delve into the costs associated with this transaction:

1/ Cost of Acquiring Dr. Johnson as a New Customer:

Acquiring a respected orthopedic surgeon like Dr. Johnson required a strategic marketing and sales effort. The company allocated a marketing budget of $60,000 for targeting potential customers in her field, including expenses for outreach, meetings, and promotional materials. Michael Reynolds’ salary and expenses for the year amounted to $18,000. Thus, the total cost of acquiring Dr. Johnson as a new customer was approximately $78,000.

2/ Incremental Cost of the Device:

Developing the BoneGuard Pro Plus involved significant research and development expenses. However, the incremental cost of manufacturing one additional device was relatively modest compared to the initial development costs. This included manufacturing, quality control, and packaging expenses, totaling approximately $2,500 per unit.

3/ Incremental Cost of Servicing the Customer:

Maintaining a strong relationship with Dr. Johnson was crucial. OrthoTech Innovations committed to providing exceptional service, which included regular visits by Michael Reynolds to ensure the device’s optimal functionality and address any concerns. The servicing cost, covering Mr. Reynolds’ salary, travel expenses, and necessary materials, averaged around $3,500 per year.

4/ Sales Commissions and Instrument Asset Allocation:

As part of the sales process, Michael Reynolds received a commission for securing Dr. Johnson’s business, which typically amounted to 10% of the device’s price. With the BoneGuard Pro Plus priced at $12,000, Mr. Reynolds earned a commission of $1,200. Additionally, OrthoTech Innovations allocated a portion of their instrument inventory to Dr. Johnson, valued at approximately $6,000.

In conclusion, while the incremental cost of producing the BoneGuard Pro Plus device was reasonable, the overall cost of acquiring and servicing Dr. Johnson as a new customer was more substantial. However, OrthoTech Innovations recognized the long-term value of collaborating with esteemed orthopedic surgeons like Dr. Johnson, as they not only helped promote their current product but also acted as influential advocates within the orthopedic community, driving further adoption of the company’s innovative orthopedic surgical devices.