BUSINESS OF EYECARE

  competition

Lowering Your Prices to Compete

You may not want to; here’s why

GREG STOCKBRIDGE, O.D., M.B.A., HOLLY SPRINGS, N.C., AND ALLAN BARKER, O.D., ROCKY MOUNT, N.C.

When online, big box or other price-cutting retailers begin to take some of a private-practice O.D.’s eyewear sales, that business owner often thinks lowering prices is needed to remain competitive. But, reducing prices can cause a decrease in service, which may prompt patients who have always bought their eyewear from you to go elsewhere. In fact, the No. 1 reason businesses fail is because they try to reduce their prices to remain competitive while trying to maintain their customer service, says Harvard Business School Professor Michael E. Porter, who studies the competitive advantages of large companies and has written several books on this subject.

Here, we explain this in greater detail.

Overnight lodging

Motel 6 and the Ritz-Carlton provide overnight stays in two totally different ways. The former provides a basic room at a low price, while the latter provides unprecedented service.

Both companies have the same goal of keeping their rooms full and, as a result, sometimes offer specials, generally in the off season, to help ensure a steady stream of customers. But the special prices the Ritz-Carlton offers are still quite higher than the special prices of Motel 6. The Ritz-Carlton knows it can’t compete with Motel 6 prices; therefore, it focuses its marketing efforts on a section of the population willing to pay a higher price for exceptional service.

Let’s pretend the Ritz-Carlton starts to advertise prices equal to Motel 6. This is definitely an easier way to attract customers, as all the luxury hotel chain has to do is market its prices to everyone instead of a select market. The problem: Due to the significant lowering of its prices, the Ritz-Carlton’s revenue decreases, requiring it to make cutbacks. (Remember, it has designed a business around a certain stream of revenue.) It is much harder to make cutbacks on fixed-cost items, such as rent and/or bank payments and utilities and much easier to cut customer-focused employees, high-quality room bedding, curtains and carpets. But, making cuts on the latter items lowers the quality of service and eventually degrades the opulent atmosphere for which the Ritz-Carlton is known, alienating its traditional clientele.

Something else to keep in mind: Ritz-Carlton hotels are often located in large cities and resort areas that have high rent or mortgages in comparison with the locations of Motel 6s. Therefore, it is very likely that the reduction in revenue stream would become too low to sustain the once luxurious hotel chain.

The price-cutting optical

As is the case with Motel 6 and the Ritz-Carlton, price-cutting optical chains and private-practice optometrists provide spectacles and contact lenses in two completely different ways. The former focuses on low pricing, while the latter hones in on providing exceptional patient care (e.g., well-trained, courteous and reliable staff, the latest equipment, patient education on ocular conditions and products and a selection of frames, ophthalmic lenses and contact lenses). Private practitioners can provide this exceptional service because of the fees they charge.

Let’s say that you, the private-practice O.D., decide to lower your spectacle prices because a discount optical has taken a few of your eyewear sales. You reason, “My practice will be able to maintain excellent patient service by becoming more efficient.” The problem: This is possible only to a certain degree. There will come a point at which that exceptional patient care will start to suffer.

For example, a private practice starts offering a complete pair of glasses for $49. This practice has three opticians. The price garners tons of people the opticians have never seen before. While the sale is occurring, the optometrist walks a long-time patient to the optical. Usually, the O.D. hands the patient off to one of the opticians, explaining his recommendation and why. This time, however, all the opticians are busy, and the patient not only has to wait, he also has no place to sit. Twenty minutes later, he is helped — a longer wait time equals a lower capture rate — and is then rushed through the “try-on” process. In addition, due to the influx of customers, the optical staff no longer has time to scrupulously order and check in jobs, which places the practice at risk for inaccurate prescriptions and, thus, delayed turnaround times — something long-time patients, like the above, won’t appreciate.

The following year, the patient hesitantly returns to the practice to find two opticians (the O.D.’s margins shrunk, requiring him to lay off the other optician) and a wait time of 30+ minutes. He decides never to return. Think he’s the only long-time patient who decides to go elsewhere? (See “The Cost of Price Cutting” below.)

We recognize that hiring additional staff to counteract drops in service levels helps if additional revenues offset the increase in employee costs. You may think, “I can increase my professional fees as a counteracting measure.” However, the medical model of optometry requires a serious commitment with adequate investments in staff and instrumentation; it is not something about which you can merely give “lip service.”

Cut at your own risk

As the above examples illustrate, cutting one’s prices decreases customer service, which ultimately hurts one’s practice. Offering low-end products just to remain competitive, reducing your staffing and not making your patients feel special sends your patients the message that they can get just-as-good service elsewhere for even less. OM

The Cost of Price Cutting: An Example

Nobody likes to see his or her net profit decrease by $100,000. Maybe the practice owner thinks his 20% reduction in fees will attract more patients and, therefore, offset the net profit reduction. To make up the difference, the practice owner would have to generate an extra $150,000 because the cost of goods (COGS) is now 33.33% instead of 30%. The average revenue per patient is no longer $400, but is now $360 ($160 optical + $200 services). To make an additional $150,000, this practice would have to see 417 more patients (417 x $360 = $150,120).

Dr. Stockbridge graduated from New England College of Optometry and received his M.B.A. from Duke University and is VA residency trained in hospital-based optometry. E-mail him at gstockbridge@eyecarecenter.com, or send comments to optometricmanagement@gmail.com.

Dr. Barker is president of Eyecare center and serves as vice president of Optometry Cares - The AOA Foundation and is on the Essilor ECP Advisory Panel. E-mail him at abarker@eyecarecenter.com, or send comments to optometricmanagement@gmail.com.