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Hard Cost Savings vs. Soft Cost Savings

September 23, 2021

We’ve covered the Impacts of Buying Smart. But as a reminder, cost savings go straight to your bottom line. Meaning, to increase $1.00 in profits, you can either earn an additional $2.94 in revenue, or find $1.00 in cost savings.

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    Financial Impact of Cost Reductionhard cost vs soft cost

    But what exactly constitutes “cost savings?”

    Let’s consider Janet. Janet works in your dental practice and has a variety of responsibilities, most of which are directly related to servicing your patients. Janet is also, however, responsible for the purchasing of dental supplies. This responsibility takes Janet X numbers to perform. Now let’s say you implement processes that reduce the amount of time it takes Janet to purchase supplies by fifty percent. Would you consider these cost savings?

    There are significant benefits to increasing efficiencies and freeing up your employees to focus on what they do best, taking care of your patients. And although these improvements should help save you money and better your bottom line, the savings are indirect and difficult to measure. Hence, they are considered to be what is known as “soft” cost savings.

    To clarify things further, here are just a few examples of both hard and soft cost savings.

    “Hard” Savings

    • The purchase price of a supply is reduced.
    • Reduction in labor, IF, that reduction actually saves in labor costs. I.E., Janet is an hourly employee, and her hours are thereby reduced.
    • Shipping costs are reduced or eliminated.
    • Lowering usage quantities, i.e., we now reuse an item rather than discard it, reducing our total monthly or yearly spend on that item.

    “Soft” Savings

    • Lowered inventory levels resulting in improved cash flow.
    • Extended payment terms, allowing you to pay later and improve cash flow.
    • Improved employee satisfaction or decreased turnover rates.
    • Improved efficiencies, which thereby allow you to increase production rates.

    In other words:

    Hard savings= Savings directly, quickly, and easily measurable on your profit and loss statement.

    Soft savings= Possibility for future indirect improvements to your bottom line, most often due to improved efficiencies.

    Although there are clearly great benefits to soft savings, they are simply harder to quantify and measure. And when it comes to “hard savings”, if you want to ensure they improve your bottom line, it’s important to educate buyers on the pitfalls they need to watch out for.

    Cost Avoidance

    We’ve already established that actual hard cost savings are tangible and immediately impact your financial results. Cost avoidance is, as the name hints to, a cost you circumvent through preemptive actions. Cost avoidance measures include negotiating a reduction in or eliminating price increases or eliminating the need for increased labor through streamlined processes.

    It’s important to remember that although soft cost savings and cost avoidance may seem or feel less important than hard savings, that is most often far from the case. Their intangibility doesn’t necessarily align with the value they bring to your organization.

    For instance, improved inventory control may ensure you avoid stock-outs on critical dental supplies, safeguarding your service levels, and preventing a revenue loss. These things are vital to your organization’s health and your potential growth, and their importance is no less significant, perhaps even more so, than your supplies purchase price.

    It’s essential to understand how the varying types of savings may impact your financial statements, but it’s also equally important to keep the naming conventions in perspective.

    Despite the name, hard cost savings are hard worked for and can bring massive benefit to your dental practice. Don’t underestimate them.

    Leverage Method to Improve Your Cost Savings

    Using a dental inventory management system helps you improve your bottom line, both from a hard and soft cost savings standpoint. To learn more about how Method can help your dental practice, contact us today to get a free demo and talk with our dental procurement experts!