Eye care providers: take these action steps to reduce COGS, boost profits, and win!
In this article, we’re taking on a big task: helping you identify profit centers, cost centers, and the behaviors that influence them. Understanding cost of goods sold (COGS) is a fundamental component of any company's financial health, as they should directly relate to the retail price of the product being sold. Whether you run an eye care practice or a restaurant, understanding your COGS is essential to making informed decisions about pricing which in turn impacts your profitability.
Understand the impact of COGS
If your goal is a comprehensive understanding of your business and the variables therein, then you must develop mechanisms by which to measure your COGS. If your goal isn’t a comprehensive understanding of your business, then we humbly suggest that it probably should be.
If your practice is focused around a more boutique optical experience, your COGS will include basics like the cost of the frames, lenses, coatings, treatments, shipping, any other costs associated with the actual production of eyewear; additionally, you’ll want to include any direct labor costs involved in their production, and any additional experiential costs your practice incurs to create that experience.
Some boutiques serve their patients water, coffee, champagne, cocktails, even snacks sometimes. To measure COGS in this context, you would add up these costs for each pair of glasses sold, and divide by the number of units sold to calculate an average COG per unit.
On the other hand, if your business has a more medical focus, your COGS might be influenced by additional factors such as medical equipment costs plus maintenance, materials, consumables, specialized personnel, and so on - to accurately measure COGS in this context, you would need to take these additional costs into account and adjust your unit economics accordingly. It’s also worth considering that your COGS unit is less important in a primarily medical practice because your revenue sources are more service oriented.
Negotiate effectively with vendor partners
One effective approach to achieving your bottom line revenue goals lies in negotiating better deals with suppliers. Simple enough to understand: by securing lower prices on the goods and services that your business relies on, you can reduce your costs and increase your profitability. If only getting better deals were so simple.
The negotiating power of an eye care practice (ECP) can vary depending on a number of factors: patient volume, sales volume, the payment models used by its customers, perhaps most crucial here is the nature of your business relationship with each vendor.
Individual ECPs may struggle to secure lower prices or better deals through simple negotiation due to their smaller size, limited purchasing volume, and age of the relationship. One way to easily improve your negotiating position is by joining a buying group. Individual ECPs can benefit from the collective purchasing power of multiple businesses and the negotiated rates the buying groups have already laid the groundwork of which you can take advantage.
Also, think about how your patient population actually breaks down in terms of payment model. Your ability to negotiate with vendor partners has a lot to do with whether or not you’re working with a private pay patient or one with a low-reimbursing vision plan.
If the majority of your patients are paying for their products and services out-of-pocket, you have more leverage in negotiations with suppliers for a few key reasons:
The price you pay suppliers directly impacts your bottom line, which is not necessarily the case with vision plan patients
As a primarily private pay account you’re much more able to switch suppliers when one isn’t working out for you.
If your practice is primarily composed of vision plan patients, you have less negotiating power as your vendor partners likely already have a deal in place with those vision plans, and you’ve already agreed to work with vision plan approved vendors when you signed the contract.
Manage inventory like it matters
In order to determine which products your practice needs to keep in stock, it’s important to have a clear understanding of the products and supplies that your practice uses on a regular basis. This inventory should be periodically reviewed and updated to ensure that it accurately reflects the current needs of the practice. By creating a comprehensive list of all the items that your practice uses, you can more effectively manage your inventory and avoid running out of important items when you need them.
One effective inventory management technique is to implement a system for tracking the flow of products and supplies in and out of the practice. This can be done manually or with the use of software, but the key is to establish a consistent process by which your team can track inventory levels, monitor usage, and respond accordingly while maintaining records at each step.
Along these lines, it’s imperative that you establish an ordering process that is efficient, reliable, and consistent such that your entire team is able to understand and execute. Keep things like working with suppliers to negotiate better deals on your most common products in mind as you move forward. Some partners will give you discounts for setting up autoshipping that triggers new deliveries when supplies are running low. Also, don’t forget to set up clear guidelines for when items should be ordered to avoid overstocking and the associated costs.
Automate, simplify, and streamline where it counts
While automation can certainly play a role in streamlining processes, it is as important if not moreso to invest in the training and development of staff members and the implementation of automation and, more broadly, any other technology. When combined with delegation, staff training and automation can help practices to achieve their goals while improving patient and practice outcomes.
Delegation is a powerful tool for maximizing the potential of your staff. By assigning tasks to the right people and freeing up your time to focus on more strategic initiatives, you can build a more productive and efficient practice. Staff members will have the opportunity to develop new skills and take on new responsibilities, which can be especially beneficial in the long term.
Buy in bulk with intention
Bulk purchasing is a common strategy that many businesses use to reduce their cost of goods and increase their overall revenues, but it’s often misapplied or rendered ineffective by other choices or obstacles.
Consider the consumables you use in every exam and pre-test, bulk purchasing can help to reduce the costs associated with these repeated, small scale purchases. By buying larger quantities of items like gloves, lens cleaner, and other exam supplies, practices can secure better prices, reducing the overall cost of these items.
These same principles apply to higher impact retail goods like contacts and finished lenses. In addition to lowering your COGS, bulk purchasing can help to improve your inventory management process, reducing the need for frequent stock checks and re-orders, and all the associated work which also comes at a cost.
Additional food for thought: if you maintain a larger inventory of your most popular items, you reduce the risk of stock shortages and backorders while drastically reducing your spending on freight. This can help to improve patient satisfaction, as customers in general prefer businesses that keep convenience and value in mind.
Reduce operational waste
One area where reducing waste can be particularly impactful is in the ordering of frames. Balancing the desire to keep a large inventory of frames to meet the diverse needs of their patients, with the need to minimize waste by avoiding overstocking is among the most complex of the many challenges a practice owner faces today.
On one hand, having a large inventory of frames can help to ensure that patients are able to find the frames they need in the size and color they prefer. This can improve patient satisfaction and ultimately help drive sales. On the other hand, overstocking can lead to waste as frames that are not sold become obsolete and must be discounted or otherwise removed from your inventory.
By having intelligent controls in place, you can minimize the risk of overstocking and reduce the amount of waste generated by your practice. A baseline for any kind of intelligent process is understanding. Think about how carefully tracking the sales of different frame models impacts how much you know about your inventory, turn rate, and future needs. By keeping these kinds of things in mind, you will make more informed decisions about not just which frames to order in the future, but why, how, and when.
Taking a slow and steady approach to lowering your COGS will create an increasingly measurable effect over time. Once you identify these opportunities, it can certainly be tempting to try to solve every problem all at once; however, it is best to focus on one action at a time, gradually building momentum and making progress towards your broader goal of gaining control of your COGS.
By focusing on reducing waste, streamlining processes, training your staff, and negotiating better deals with suppliers, you can make meaningful progress towards lowering your COGS. What we’re describing is a long-term commitment to the success of your business and a willingness to not just embrace change, but to be an agent for it. By taking a measured, step-by-step approach you will make meaningful and measurable progress towards having the practice you’ve always wanted.