Benchmarking Your Optical Dispensary
Here are some strategies to price, purchase and account for your eyeglasses.
ARTHUR DE GENNARO

One of the interesting things about the ophthalmology world is the amount of confidence it places in benchmarks. I say this because while monitoring a couple of e-mail sharing groups over the last few years, it was fascinating to see how enthusiastically benchmarks were sought and shared for nearly every aspect of practice life.

This is not surprising, as I did the same thing as an optical chain store executive. In fact, one of the richest experiences of my career was being invited to join an information-sharing group, where benchmarks, as well as other sensitive company information, were discussed.

This is the first article in a two-part series intended to look at some common benchmarks for an optical dispensary and offer advice to help improve your results.

Cost of Goods Sold

Of all the components of an optical dispensary, the most commonly cited problem is the high cost of goods
sold (COGS). COGS has several influencing factors. Unfortunately, no industry group publishes a COGS benchmark, so we are left to experience to set a COGS figure.

It is my experience that "best in class" practices can attain a cost of goods sold of 28%, while the poorest performers will exceed 50%. This is a wide range, and since the cost of goods sold is the single most expensive component of running an optical dispensary, COGS needs to be the most closely watched. Ideally, this number should not exceed 36%. Below are some of the factors that influence the COGS.

Retail Pricing

In my work it is more common to find room to increase retail prices than it is to find prices are already prohibitively high. There are a number of reasons for this, and not the least of which are: a lack of competitive awareness, improper positioning of the dispensary with regard to the socioeconomic and demographic profile of the practice's patient base and a failure to establish the value of the products and personal service the patient receives for the price they pay. Here are some strategies you might use to approach pricing.

Conduct demographic research. Ask key questions. How far will customers travel to visit your practice? How old are they? How much disposable income do they have? How much of their discretionary dollars are spent on routine eye health maintenance and eyewear annually?

Conduct competitor research. Some key questions to answer here are: Who are your competitors? What are the success factors that make any optical dispensary successful? How does your dispensary fare in each of those categories with regard to your competitors? What is it your competitors do most successfully? What is it they do least successfully? What can you do to encourage your patients to purchase from your optical dispensary?

Conduct a pricing survey. Many ophthalmology dispensaries shop their competitor's prices. Unfortunately, while price shopping, it is not common for the surveyor to ask the competitor what brand of lenses they use. This is significant because the price fluctuation for different brands of lenses with the same design is remarkable. Ophthalmology dispensaries have a tendency to use high-end products, while the chain stores have a tendency to use brands that are more cost-effective.

Take another look at your pricing model. Lens and frame prices are most often arrived at by using the "times" system. Under this system, the frame or lens wholesale price is increased by a multiplier — in some cases, numerous times. The most commonly used multipliers I see range from two times to four times. It is important to not attempt to match your competitor's prices or to have prices that are in line with those competitors who do business in the same segment of the marketplace as you do. You should think positioning instead of pricing. After all, a carton of milk is more expensive at a convenience store than it is at a supermarket. From a practical standpoint, practices that offer eyeglasses should be able to command higher prices.

Inefficient Purchasing Efforts

Statistically, frame sales represent approximately 45% of a dispensary's net eyeglass sales. Since the stakes are so high, it is important that the frame collection's creation and maintenance is approached thoughtfully. The following are a few tips you should keep in mind.

Size the collection correctly. Making the collection too large for the volume of sales uses cash unnecessarily and will cause you to have too many frames not selling.

Create a system that identifies when frames need to be returned for exchange credit. This is important because frames that are not exchanged within a particular window of opportunity will be discontinued by the manufacturer and therefore ineligible for exchange. This "dead" inventory tends to accumulate under counters and in backrooms of dispensaries, where the value, already charged to cost of goods sold, has not been translated into sales and cash flow.

Select vendors carefully. While there are nearly a dozen factors that make a frame vendor desirable, not the least of these factors is the vendor's desire to provide financial support. Such support comes in the form of discounts, cooperative advertising allowances, prompt payment incentives, cash back arrangements, commissions to staff for selling their product, financial support for special projects, trunk shows, training and more.

Deal directly with vendors. A growing trend in ophthalmology dispensing is to use buying groups. Although buying groups can fill a need by negotiating with vendors, thereby saving doctors some money, it is my experience that negotiating directly with the vendor will yield more aggressive support.

Use fewer vendors. One way to encourage vendors to improve their support level is to use as few vendors as practical. Six to eight vendors is enough to fill a dispensary of 500 to 1,000 pieces. Using this strategy will also allow you to offer your vendors more frame display spaces, often referred to as "board space," in exchange for greater support.

Frame Inventory and Cash Accounting

Tracking the COGS in an ophthalmologist's dispensary sometimes feels like trying to hit a moving target, because nearly all ophthalmology practices use the cash basis of accounting. Under this accounting method, frames received by the dispensary are booked as an expense at the time that they are paid for.

An unlikely example, using this scenario, is when a dispensary's optician orders $10,000 worth of product in the month of January but no product for the next 5 months. If the dispensary has sales of $10,000 in the month of January, the cost of goods sold for frames that month will be 100% — an unrealistic number. Yet for the next 5 months, this same dispensary's cost of goods sold would be zero — also unrealistic.

While it is true that by the end of 6 months, the aggregate cost of goods sold will work itself out, waiting that long to learn there is a problem in the inventory system is not a prudent management strategy. In the event a practice was experiencing a significant amount of customer or employee theft — something that is unfortunately more common than most of us care to acknowledge — it would risk losing significant amounts of money before learning of a problem.

By comparison, when using the accrual basis of accounting, the frames increase the value of the inventory on the balance sheet and are not expensed until they are actually delivered to the patient.

For example, assume the above practice converts to accrual accounting, and uses $2,500 worth of frame product each month and has the same $10,000 a month in sales. The cost of goods sold for frames will be 25% each month. Being able to see fluctuations in the cost of goods sold on a monthly basis would alert a practice to investigate irregularities much sooner.

There are significant tax implications of converting to accrual accounting, so it may be unrealistic to suggest all practices should change over to this method. However, I know of no retail optical chain that uses the cash accounting method, partially for the reasons mentioned above.

A solution might be to consider using a modified accrual system. This method provides for accrual accounting in the optical dispensary and cash basis in all other areas.

Cash Handling and Audit Procedures

According to one consulting firm that specializes in loss prevention, one out of every three employees steals from their employer in the amount of $1,500 per year. If you count the number of employees in your practice and do the math, you can see the magnitude of the problem and the need for action. Another consultant estimates that 2% of the profits of all retail businesses erode as shrinkage. In a $300,000-a-year dispensary this equates to $6,000 in profits.

Almost all opticians handle cash, checks and charge cards. As a result, procedures must be in place to ensure these funds are handled properly. Some strategies to consider:

Use sequentially numbered job tickets. By doing this, it will help assure all orders are written up, and protect against employee theft.

Guard against unauthorized discounts. Granting unauthorized discounts erodes profits. A schedule of authorized discounts should be put in place and scrupulously monitored.

Audit the job tickets back to the laboratory invoices. Every invoice received from the dispensary's laboratory will reference a job ticket number. This is one way to detect if an unauthorized order was placed, and the money was pocketed by the optician without reporting it.

Audit all no charge and warranty/remake orders. One way to place an order and convert the funds illegally is to place it as a warranty/remake (or no charge) order. To detect this type of theft, all such orders need to be audited back to their original job tickets.

Operate Your Own Laboratory

Wholesale laboratories make profits from manufacturing and selling eyeglasses to ophthalmology dispensaries. For this reason, you should consider installing a laboratory to gain a portion of those profits.

There are two types of laboratories: finishing laboratories and surfacing laboratories. It is my experience that installing a finishing laboratory will return about $7 net per order back to the practice, while installing a surfacing laboratory will return about $25. If you are contemplating the installation of a laboratory in your practice, consider the following:

Perform a cost/benefit analysis. Such an analysis will help you determine if installing a laboratory is feasible. Because an in-house laboratory not only saves money but also provides the practice with control of the quality and ontimesmanship of the finished product, it is advisable to install the laboratory when the project breaks even.

Use strict inventory management procedures. With the introduction of a laboratory, dispensary employees have access not only to the frames but the lenses and the means of making them into a finished product. This opens the door to increased internal theft. Strict and diligently monitored inventory control workplace procedures will help guard against shrinkage.

Looking Ahead

In the next installment, I will address other benchmarks including those for payroll, the capture rate and the sell-through of products sold in the dispensary. 

Arthur De Gennaro is president of Arthur De Gennaro & Associates, LLC, an ophthalmic practice management consulting firm that specializes in dispensary issues. He can be reached at (803) 359-7887 or by e-mail at IsForU@aol.com.