As practice managers and owners, many dispensing opticians are responsible for generating revenue and profit. They need to know about the importance of increasing average dispense values, obtaining better product costs from suppliers, and setting eyewear prices that improve revenue without being uncompetitive.
If you have that responsibility, it can be difficult to estimate the impact of any single profitability technique on your practice’s overall financial performance. There could be many other variables involved – such as a price increase, a better conversion rate, dispensing more second pairs of spectacles, a new marketing campaign, competitor activity – which might have an effect on its income.
You may also not know how relatively small improvements in each of these variables can have a significant impact on your practice’s total income and profitability.
Yet it’s important to understand how different elements inter-act to produce a higher cumulative outcome. In other words, how they have a compounding effect on practice income and profit. It’s called the Profit Multiplier Effect.
Let’s consider a hypothetical example. Suppose your practice dispenses 1,000 pairs of glasses at £100 each with a gross profit margin of 65%. This produces £65,000 profit in monetary terms.
Then suppose you increase the price by 5% (to £105), lower the cost of goods by 5% (to £33) and increase the number of glasses sold by 5% (to 1,050). What would happen to your gross profit – an increase of 15% (3 x 5%) perhaps?
In fact, the gross profit rises to nearly £76,000, an improvement of £11,000. This represents an increase of 17% on the previous figure of £65,000. It is the profit multiplier effect at work.
It demonstrates how small changes in different aspects of your dispensing management can have a meaningful impact on total practice profitability. It also illustrates why it’s important to analyse your Key Performance Indicators to discover where the most profitable changes can be made and how the Multiplier Effect can be most successfully applied.
Measuring KPIs on a regular basis enables you to check your practice’s performance over time, usually in comparison to the same period last year and against a budget set for the current year. Such measurement helps you identify important trends (e.g. a decline or increase in dispensing values) which may not be immediately apparent when you are occupied with the day-to-day running of your practice.
The most useful KPIs to analyse are total practice income, cost-of-goods, gross profit, GP%, overhead costs, operating profit, number of tests, income per test, number of dispenses, dispensing income, average value per dispense, conversion rate & number of new patients.
This is a lot to check, but your practice management system should be able to give you the figures in an easy-to-use format. Interrogating your KPIs really is the key to building better practice profitability. An hour or so spent each month is a small price to pay for the extra income you can generate as a result.
Once this analysis is done, you should be able to identify specific areas where profitability needs to be improved. You can then adopt an appropriate strategy or technique to increase your profit in each of those areas.
To help you, the Independent Marketing Partnership has produced a comprehensive toolkit called More Profits More Often. This explains how to improve a typical independent practice’s financial performance. It quantifies the relative importance of reducing costs, increasing the patient conversion rate and average dispense value, and of using a more effective recall system.
It also enables you to calculate different financial outcomes with a Profit Multiplier spreadsheet. You simply enter your KPI numbers and percentage changes to discover how much extra profit your practice could make.
The multiplier effect is just one of many ways you can use to boost profitability. It should form a key part of an overall profit action plan for your practice. Good planning is crucial. As the saying goes: ‘If you fail to plan, you plan to fail’.
When creating and implementing a profit growth plan, it’s important to prioritise those elements which will have the most impact on your practice’s overall financial performance. Hence the value of analysing your practice’s KPIs on a regular basis.
For further information on increasing practice profitability, visit www.opticalmarketing.co.uk/profits
Copyright: Graham Hutchison 2021