contacts

How Does Your Contact Lens Profit Margin Compare?

Healthy margins can make this area of practice attractive again

BY ANGEL ALVAREZ, Coral Springs, Fla.

ABB Optical calculates reliable benchmarks of the cost-of-goods and sales mix of independents eyecare providers by product. The company also conducts quarterly audits of retail pricing of independents and leading retailers to determine the best selling soft-lens brands. This data is published as the "ABB Soft Lens Retail Price Monitor" and recorded in the company's database, which provides a precise means to calculate the profit margins independents actually earn selling contacts, by product category and for individual brands.

Independent CL profit margin

An analysis conducted in September 2007 reveals that the average independent soft-lens profit margin is currently 45%. Margins are typically lower for spherical-lens brands that are widely distributed and heavily advertised, averaging 42 to 44% for these products. (See figure one.) Profit margins are higher for soft-toric lenses, averaging 51%. Unexpectedly for a premium-lens category, margins for soft multifocal lenses are somewhat below average at 45%. Margins for the new silicone-hydrogel lenses are somewhat lower than the overall category average, perhaps reflecting that most silicone-hydrogel sales today are clear spherical lenses.

Figure 1: Profit margins by modality as of September 2007.

One conclusion we can reach from this analysis is that a majority of independent providers have an opportunity to improve their contact-lens profit margin without losing patients. On average, a gain of two or three margin points, producing a 47% to 48% overall profit margin, appears feasible for many independents. For the average practice, a three-point margin improvement translates to an increased annual profit of about $5,577, based on ABB statistics.

The two principal strategies to produce margin improvement: Adopt a systematic approach to soft-lens retail pricing, and upgrade the sales mix to realize a higher sales ratio of high-margin lenses.

Figure 2: Average independent O.D. contact lens sales.

Retail pricing strategy

Our data reveal that independents charge retail prices that generally average 15% to 20% higher than the leading chains and mail-order/Internet contact-lens providers charge. The price premium varies widely by brand and by practice. Some independents try to match these entities' prices. Others charge a 50% or greater premium. A high-margin strategy for soft contact lenses isn't a good idea. This is because the Internet has made it too easy for consumers to compare prices.

Instead, adopt a tier-pricing approach to soft-lens retail pricing, varying the price per box depending on the number of boxes purchased. The top-tier, single-box price for the heavily advertised soft-lens brands should generally yield a gross margin of 45%. For new, premium spherical lenses, aim for a gross margin of 47%; for torics and multifocals, a 50% gross margin; and for gas permeable (GP) lenses and specialty vial products, a 60% gross margin.

Establish a low-price-tier for an annual-supply purchase of eight boxes of two-week lenses or four boxes of monthly lenses. The per-box price for heavily advertised lenses should be only 2% to 3% higher than the discounters — the price that should be quoted to any price shoppers. You need not discount pricing for annual supplies of toric and multifocal lenses as heavily. When you add the manufacturer rebates into the equation in presentation to patients, your price for an annual supply can be quite competitive with any retailer.

Upgrade the sales mix

When ABB surveys practitioners about their sales mix, we find most tend to overestimate their sales of higher-margin products and underestimate their sales of the lowest-margin products.

The national averages for retail sales by category among independent eyecare practitioners (ECP): Weekly/monthly clear spheres account for 57% of sales, soft torics account for 18%, daily disposables account for 11%, colors account for 7% and multifocals account for 6%. Within the large clear sphere segment, the lower-priced, two-week and monthly replacement HEMA lenses still account for 38% of sales during 2007.

Upgrading patients to higher value lenses can have a dramatic and immediate impact on your bottom line. For instance, two-week, HEMA clear spheres, though declining, make up nearly one-third of independents' unit sales. However, due to their lower, per-box retail pricing and lower profit percentage, they produce only about one-fifth of the gross profit in the average practice.

The average gross profit per box independents currently earn from the two-week replacement HEMA clear sphere is just $10.16. Two-week silicone-hydrogel lenses generate a 27% higher profit per box than the two-week replacement HEMA lenses, on average. Continuous-wear lenses produce a 171% greater profit and daily disposables 60% more per box.

Set quantitative goals to improve your sales mix and track sales performance monthly. Unless you track your efforts, old habits tend to prevail.

Develop a plan

Increasing the profitability of contact lenses is well within your reach. It starts with the measurement of the current profitability of contacts lenses in the practice. To analyze and adjust pricing to improve profit margins, follow these steps:

1. Calculate gross profit margin for each of the ten soft-lens brands you use most. Usually that encompasses at least 80% of your total usage and will give you an adequate overall picture of your margins. The steps involved in the calculation include:

• Add up unit and dollar purchases for each brand for the latest 12 months. Unless you have added significantly to your inventories through the past year, this step provides a good picture of your lens sales for the year.
• Multiply the lens units you purchased by your retail price per box for each brand. This provides a calculation of retail sales. If your management information system gives you ready access to retail sales data by brands, use that.
• Subtract the cost-of-goods calculated in the first step for each brand from the retail sales calculated in the second step. This is your gross profit.
• Divide the gross profit derived from each brand by the retail sales of the brand. This is the gross profit margin percentage.

Figure 3: HEMA lenses still make up a significant portion of contact lens sales.

2. Compare your gross profit margin percentages to the norms in this article and to the recommended margins by category. Then, determine which categories show the greatest positive or negative variance.

3. Calculate a new, tiered-pricing schedule using the guidelines in this article.

Practitioners who consolidate all their contact-lens purchasing with a single distributor have the advantage of obtaining a global view of their contact-lens usage and cost-of-goods from the activity reports provided. This greatly simplifies analysis and planning. Because of this advantage and the administrative simplicity of consolidation, a growing percentage of contact-lens purchases you make are through distributors. OM

Angel Alvarez is founder and chief executive officer of ABB Optical, the largest contact lens distributor in the U.S., based in Coral Springs, Fla.