By Adam Cmejla, CFP®
Dec. 18, 2019
This is the first of two articles by Adam Cmejla, CFP,® on evaluating practice fees to create a more profitable practice in the New Year. This piece focuses on how to determine ideal frame pricing; the second will focus on determining ideal fees for pre-testing services.
The end of the year is typically when practice owners start thinking bigger picture about the next year. They start evaluating what they want their practice to look like, how many days off they want throughout the year, how to staff accordingly for that time, what new expenditures they may be planning, as well as reviewing their current expenses to ensure their practice’s financial health is still “fiscally fit.”
A key part of fiscal fitness is having your frame inventory priced to maximize profitability.
When Was the Last Time You Increased Frame Prices?
When was the last time you increased frame prices, and what formula do you use to determine the retail prices of your frames?
I suggest taking a two-step approach to setting, understanding, and thus reviewing, your frame board.
Chances are, you’re using some type of multiplier formula (XX times the cost of the frame is your retail price) and then setting your prices toward the top of what your typical patient is willing to pay for those frames.
Have You Tested What the Upper-Limits of Your Practice’s Market Will Support?
The problem is, that is not all you need to do to determine ideal frame pricing. I’ve seen a lot of practices stop after that first step. They use a general formula to get in the ballpark of what their frame prices should be (anywhere from 2.5 – 2.9x the cost of the frames), but then they call it quits and never test the upper-limits of what the market will support.
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Once you have that first calculation as a benchmark, think about testing the glass ceiling by increasing the prices on your frames up to the point you start feeling resistance from patients.
Ask Your Team for Feedback on What They Think Would Be Too Expensive for Your Patients
In economics, this is called “elasticity of demand,” and it measures how the demand for goods or services changes based only on the change in price. Do this with your optical team at your next team meeting, and ideally, do it with a new set of frames that you don’t already have on your frame board.
Hold up the frame, pass it around to your team, and ask them how much they think the frames would sell for in your practice. Don’t tell them the cost you paid; that wasn’t the question. The point of this exercise is to start testing the upper-limits of your pricing model based on what your patients are willing to pay, not based on a random formula.
How Does This Test Play Out?
Let’s support this with an example. Say a $1,000,000 office has an already-healthy gross profit margin of 70 percent (meaning their COGS is 30 percent, or $300,000). If, through the above example and suggestions, they increase top-line revenue by just two points to $1,020,000, that’s $20,000 that drops straight to the bottom line!
They’ve increased your gross profit margin while doing nothing that affects the cost of goods, which means that all other factors in the practice being equal, they’ve just added an additional $20,000 to their bottom line.
Determine Your Practice’s Pricing Ceiling & Build In Flexibility
Your pricing ceiling depends on the type of practice you run (low volume/high net or high volume/low net), and also will depend on the original cost of your frames. It’s much easier to increase gross profits on frames that cost you $50 than it is on frames that cost you $250.
Practices should avoid having their team adopt a strict retail pricing model based on the actual cost of frames when you can purchase them at a discount.
For example, if you suddenly have the option to buy a frame at $50 that usually cost your practice $75, and your retail pricing was strictly based on a 2.5x cost formula, you’re handicapping the revenue of your practice unless you use the usual non-discounted cost of the frame.
No Time Like the Present to Begin to Test Pricing
One additional suggestion: Instead of waiting until the New Year, mid-December is a great time to test the waters on this strategy, and have an honest discussion with your team. Most offices are busy with a year-end rush of patients having to spend their Flex-Spending Accounts and other year-end benefits.
As you implement these suggestions and see the results, you’ll pleasantly find yourself with new-found income in your practice.
Then, Reap the Rewards
Depending on the other circumstances of your practice, consider pretending that the funds don’t even exist, and use those dollars as additional resources in your long-term wealth-building strategies, such as funding 401(k)’s, Roth IRAs and other important strategies that align your finances with your strategies. You may also focus on the other side of your personal or practice balance sheet through the reduction of debt.
Either way, have a plan and then work the plan. What gets measured gets managed.
>>This article is based on a recent podcast episode of Adam Cmejla’s show, “20/20 Money.” For the full interview and discussion, visit www.integratedpwm.com/54<<
Adam Cmejla, CFP® is a CERTIFIED FINANCIAL PLANNERTM Practitioner and Founder of Integrated Planning & Wealth Management, LLC, an independent financial planning & investment management firm focused on working with optometrists to help them reach their full potential and achieve clarity and confidence in all aspects of life. For a number of free resources, visit https://integratedpwm.com/ebooks/ and check out the “20/20 Money Podcast” on Apple Podcasts or your favorite podcast platform to get more tips on making educated and informed financial and business decisions.