Sporting goods manufacturers and those who use their products became very conscious of the “sweet spot” about three decades ago. Since, the makers of tennis rackets, golf clubs, baseball bats and more have developed and promoted larger sweet spots in their products.
Sporting enthusiasts recognize that the sweet spot is the area of the racket, bat or club that imparts the greatest power and control to the ball they strike. And, that they may be a more powerful and accurate player if they use the larger sweet spot.
Home care companies also have a sweet spot. It is the 20 percent of product/payer combinations that produce the highest net profit margins.
An example of a product/payer combination is “K0001/Medicare.” It most likely produces a different contribution to the bottom line than the combination “K0001/Blue Cross.” That is why it is important for providers to consider product/payer combinations. If they produce different contributions to the bottom line, it may be inappropriate to give them equal attention in your sales efforts.
Sweet spot management is the development and execution of strategies and tactics that identifies the most profitable product/payer combinations — and works to make the most profitable combinations the most sold. It could also be said that the highest-yield combinations are made the highest-volume combinations.
Sweet spot management generally has a significant impact on profit improvement. It also results in productivity improvement, to which providers must give careful attention.
The accompanying tables demonstrate the impact of sweet spot management. Table 1 represents a provider that, for simplicity's sake, has three payers and two products (wouldn't it be nice). In the first column, the combinations are listed. The second column reports the revenue from that particular combination.
The third reports the percentage of total revenue, and the fourth represents profit margin after deducting the cost of goods and the cost of activities associated with the product-payer combination.
Table 1 shows that the most profitable combinations may not be the highest-volume combinations. In this example, the greatest revenue comes from a relatively low-profit combination. If sweet spot management is successfully applied, the sales of the combination “Payer 1/Product 2” would become the highest sales producer.
Table 2 shows what could happen as a result of redirecting sales according to net profit. Notice the overall net profit margin increases from 7.5 to 10.1 percent. That is 33 percent, even without growing sales or reducing costs. These are hypothetical figures, but they show that identifying your best product-payer combinations can pay off.
Sweet spot management is a powerful tool that providers can use to manage an environment with shrinking reimbursement rates.
Wallace Weeks is founder and president of Weeks Group Inc., a Melbourne, Fla.-based strategy consulting firm. He can be reached at 321/752-4514 or by e-mail at wweeks@weeksgroup.com.
| Product-Payer Combination | Revenue | % Revenue | Net Profit Margin |
|---|---|---|---|
| Payer 1 / Product 1 | 21,000 | 17.4% | 9.4% |
| Payer 2 / Product 1 | 7,000 | 5.8% | 4.2% |
| Payer 3 / Product 1 | 4,000 | 3.3% | 8.8% |
| Payer 1 / Product 2 | 14,000 | 11.6% | 13.8% |
| Payer 2 / Product 2 | 42,000 | 34.7% | 6.7% |
| Payer 3 / Product 2 | 33,000 | 27.3% | 5.3% |
| Total | 121,000 | 100.0% | 7.5% |
| Product-Payer Combination | Revenue | % Revenue | Net Profit Margin |
|---|---|---|---|
| Payer 1 / Product 1 | 33,000 | 27.3% | 9.4% |
| Payer 2 / Product 1 | 4,000 | 3.3% | 4.2% |
| Payer 3 / Product 1 | 21,000 | 17.4% | 8.8% |
| Payer 1 / Product 2 | 42,000 | 34.7% | 13.8% |
| Payer 2 / Product 2 | 14,000 | 11.6% | 6.7% |
| Payer 3 / Product 2 | 7,000 | 5.8% | 5.3% |
| Total | 121,000 | 100.0% | 10.1% |
