• Is Your Pricing Right?

    by Mark Overton

    Your practice obtains around 80% of total income from the sale of frames, lenses and other products. Product and service pricing has a major impact on your bottom line. An important factor in the financial success of your practice will be the decisions you make about pricing.

    What Will Customers Pay?

    The process of determining price varies from practice to practice, but ultimately the final price you settle on for a particular product will be a combination of the demand for that product from customers, its general availability, and the perception of risk reduction and general service you can provide in support of the product.

    There are discount operators who sell spectacles and sunglasses so why doesn’t everyone buy from them if their prices are lower? In reality true price shoppers are uncommon. Most people buy products from particular practices because the total offering of service and risk reduction is better than competitors.

    For most practices word of mouth is the biggest source of referral. This is no accident. Patients choose to select an optometrist this way because it reduces the risk of a bad outcome when they know little about the product or service they are buying. It follows then, that they will pay more for reduced risk, particularly when this is accompanied by increased control of the transaction through improved knowledge and service. Warranty and product support can be important determinants of a pricing decision as a tangible demonstration of risk reduction.

    It is also important to consider the demographics of the region where the practice is located and your target market. The presence of local competition can also affect pricing decisions as can duplicate or substitute products.

    Deciding what you patients will pay is not easy, but can be tested simply and quickly by varying prices on selected high use products and measuring the effect.

    Target Profit and Sales.

    Your practice should have specific targets for sales and profit The way you price will determine the volume of product to be sold to achieve targets.

    If you reduce prices, you will need to sell considerably more stock to compensate and maintain gross profits. A 10% drop requires an 18% rise in unit sales to maintain gross profit.

    Furthermore, if you do feel it a viable option to increase your pricing, an interesting fact is that if prices were increased by 10%, sales must drop by 15% before gross profit is affected. You will make an immediate difference to gross income and it is unlikely to affect patient numbers.

    The following table illustrates this clearly.


     


    -10%

    0

    10%

     

    Av $ Px

    270

    300

    330

     

    Volume

    2,490

    2,100

    2,100

     

    COGS

    105

    105

    105

     

    Gross Profit

    165

    195

    225

     

    Total GP

    410,850

    409,500

    472,500

     

    Expenses

    184,883

    184,275

    184,275

     

    Profit

    225,968

    225,225

    288,225



    Do you find that it is easier to pay $295 rather than $310? This pricing principle is not without basis. A recent study published in Harvard Business Review showed a 30% increase in sales of the lower priced product compared to the same higher priced product. Consider carefully how each individual frame and lens is priced and try to improve sales or take advantage of high demand.

    Remember, regular reviews of pricing are vital if profitability is to be maintained. Competitiveness does not mean “as cheap as” or “cheaper than”. Decide what your total product package is worth relative to your competitor offerings and price accordingly. Do not undersell because of one or two discount shoppers.

    You need to formulate a pricing structure for your product and base it on the products quality, your quality of service, the demographics of the region, your market position and some extent, your competitors. Focus on patient education and risk reduction. Once a set formula has been devised for pricing, it is important that it remains consistent throughout the practice.



    Mark Overton - Ideology Consulting


    Mark Overton is a professional consultant from Ideology Consulting, with an academic background in science and business. He has 28 years experience working in both the public and private sectors and specialises in optometry practices and related organisations.
  • Twitter

  • Facebook