Negotiate COGs to Boost Optometry Practice Profitability
By Courtney Dryer, O.D. October 05, 2022
Most optometrists are aware of the current inflation problem. While the costs of goods and services continue to rise, our insurance reimbursements do not. It’s imperative to monitor and modify budgets and expenses to optometric industry standards.
COG (Cost of Goods) is the total of all costs used to create a product or service. In optometric practices, this would include frames, lenses, sunglasses, eyeglass accessories, contact lenses, and medical supplies. COG brings in most of the business’ income but is also a large office expense. Optometric experts recommend COG should be from 27 to 33 percent of total income. COG should be set at the beginning of the year by an annual budget and monitored monthly.
When you first open a practice, it is difficult to know how much you should be paying for goods. Each lab representative presents a different pricing guide, prices may/may not include edging or custom add-ons. Doctors must factor in shipping costs, are they per job? Per day? Per box?
Frame prices can vary significantly as well, and like lenses, it can be difficult to know a fair price.
Negotiation can improve with doctor education and over time.
Barriers to Negotiation
A few barriers to negotiation exist including who to negotiate with and at what volume.
Point of Contact
It can be difficult to know who your point of contact for negotiation is. In my experience, lab/frame representatives can be a revolving door. Unless you have a long-running relationship with a particular representative it may be difficult to negotiate.
Negotiation with frame lines can also be difficult especially with luxury lines. Frame reps may be able to offer a few extras to offset cost, but some policies are pre-determined by the company. Instead of negotiating the base frame cost, free shipping, drop-shipping on frame cases, and a 1:1 exchange rate may be more beneficial in the long-run.
Lab Volume
"a magic number of $15,000"
Long-term relationships seem to come with better bargaining power than lab volume. Spectacle lens companies and frame labs understand there is a lot of industry competition, and it is easy to change labs. The optical lab industry is quite competitive. While the volume needed for substantial discount is likely to vary, one optical expert provides a magic number of $15,000 in order to get a volume discount on frames.
Negotiation Techniques
While one is not able to compare spectacle frame line to line on price, researching and comparing spectacle lens lab pricing can yield positive results. Don’t forget to factor in the add-ons.
Buying Groups
Joining a buying group can be beneficial particularly if a cold start-up. After participating, a doctor is now privy to volume discounts. Some frame lines may allow you to continue with these discounts should you leave a buying group. The buying group has negotiated pricing at a higher discount than an individual office may be able to do. Most times, this is a 3-5% additional discount. Discounts vary by group, but typically range from 20 to 30 percent for eyewear and five to 10 percent for contact lenses. Keep in mind, some buying groups require a monthly fee to be part, a practice owner must evaluate the benefit/cost ratio. Ideally, a doctor would select a buying group based on the discounts given to their preferred lens manufacturer and frame line vendors.
Concentrate Your Dollars
With both spectacle frames and contact lenses, concentrating your dollars into as few companies as possible can be financially beneficial. If you order deeper with one vendor, you are privileged to get better discounts. Some frame lines offer 30-60-90 pricing with a high-volume order which can help you manage cost flow. Purchasing discontinued or close-out frames will also help you minimize your COG and increase your profits.
Contact lens companies are now offering base rebates and growth rebates. There may be varying strategies amongst owners when it comes to fitting lenses. Some optometrists may choose to buy from one company maximizing their quarterly rebates, but it is often difficult for them to capture growth rebates, particularly in established practices. Other optometrists may choose to utilize one company a quarter or year and then utilize an alternate company to capture the growth rebate. Reps can be your best resources, but maximizing these rebates routinely can be a difficult task.
To keep your costs low and to negotiate pricing, an optometrist must be active in the buying process. Even if your staff is well-trained, they are unlikely to care and manage costs the way the owner optometrist will. By evading barriers to negotiation, taking advantage of buying groups, and concentrating your practice dollars, optometrists may have bargaining room and successfully price negotiate.