Drilling Down on Cost of Goods: Key Strategies for Optometry Practices

Profitability within the optometric profession is more challenging than ever. As independent owner O.D.s, we find ourselves in a deflationary period due to decreasing reimbursements from insurance companies and increasing competition within the optical marketplace. Simultaneously, we’re experiencing the most significant inflationary period in the last three decades, with rising costs of utilities, rent, goods, and labor wages continuing to hammer the bottom line of our profit and loss statements.

Understanding COGS in Optometry

National statistics indicate that most optometry offices see their Cost of Goods Sold (COGS) ranging from 27% to 35%. This figure is calculated by dividing the total cost for frames, lenses, contact lenses, and associated shipping by the gross revenue. There is some nuance to these numbers, especially when comparing practices due to the makeup of each practice’s gross revenue. For simplicity, offices with a higher percentage of their gross revenue from medical eye care typically have a lower COGS percentage than those with a higher emphasis on routine exams and product sales. Regardless of where your practice falls on this spectrum, there’s significant opportunity to regain ground in our profitability amid rising costs.

Strategies to Lower COGS and Increase Profitability:

1. Reconciling Vendor Invoices and Statements: Surprisingly, many owner ODs do not have a reconciling process in place. Without verifying, how can we be sure we are charged correctly for each set of lenses, frame, and contact lens order? Historically, ophthalmic lens vendors are known for not being precise with charges or providing proper credits for remakes or second-pair discounts. Early in my career, an ophthalmic lens vendor owed me almost $6,000 in overcharges and missed credits in just a six-month period. Assigning a staff member the simple task of monthly reconciliation with the price list and invoices compared to statements will not only pay for their time but also increase your bottom line.
2. Questioning Vision Plans with ‘Additional Rebates’: Many practices opt for specific brands because a vision plan offers an additional rebate. However, when evaluating the actual savings, it’s crucial to consider whether the discounts and rebates actually lower costs or if better options are available. Opting for a frame line that offers a 5% discount when you could sell another frame with a 30% to 70% discount is a common oversight where practices might be tripping over dollars to pick up pennies.
3. Leveraging Buying Power with Alliance Groups: Numerous alliances offer better pricing for frames and lenses through upfront costs or back-end loyalty/usage rebates. It’s essential to compare and vet these opportunities carefully. Watch out for groups that charge membership fees, whether monthly or based on a percentage of your gross income. My choice to join Partners in Profit was driven by their ability to provide industry-leading discounts on products without membership fees or requirements to drop membership from other alliance groups.
4. Innovative Frame Board Management: Moving away from the traditional risk of stocking frames, consider a frame board model where frame vendors stock your boards at no cost and also cover shipping charges when ordered and sent directly to partner labs. This approach significantly reduces overhead costs related to inventory and shipping, directly impacting your COGS and improving your bottom line.

Utilizing these strategies can substantially reduce your COGS and boost your overall profitability. 

Members of Partners in Profit have seen reductions in their COGS by as much as 10% or more, with some achieving less than 20%, which is outstanding by industry standards. If you are a practice generating $1 million in gross collected revenue, saving even just 5% on COGS can net you an additional $50,000 in take-home income. Drilling down on COGS truly matters!