Optometric Management Tip # 333   -   Wednesday, June 18, 2008
An Eye-Opener About Discounts

Offering discounts on eye care services and products is very damaging to practice net income, yet the strategy remains very popular. Eye care professionals (ECPs) give discounts, with the hope of stimulating more business, in many different ways and to many different groups of people. Examples include senior citizens, children, payment at time of service, multiple pairs of glasses, contact lenses with eyeglasses, contact lens service agreements, professional courtesies, service clubs, church members and the occasional special sales event.

Additionally, many practices participate with major vision plans which also mandate discounts. For purposes of this discussion, letís set aside vision plan participation and concentrate on discounts that are voluntarily offered by the practice. We should consider, however, that some ECPs promote a home grown, self-managed discount vision plan which is sold directly to local business and industry.

Do discounts work?

Iím all for any strategy that increases profitability, but in my opinion discounts usually fail to make the eye care practice more money. The usual scenario is that people who would have bought goods and services anyway are now able to do so at a lower cost. That actually hurts practice profitability. A discount is only effective if it stimulates new, additional sales and it must stimulate quite a few more sales to make up for the reduced price.

In my view, fees are already generally too low in most eye care practices and to discount them further makes no sense. A strong focus on prices and discounts moves the practice in a strategic direction that is not in its best interest. Low price becomes the market niche instead of excellent service and high quality products. Fees are always a factor in a patientís decision making process, but letís not have your practice philosophy bring it to the forefront.

A startling example

To demonstrate just how damaging discounts are to your bottom line, letís consider this example.

Suppose a practice provides a 20% discount off services and products in a home made vision plan it offers to employees of XYZ Manufacturing. A patient receives an exam and eyeglasses that would usually total $500 and we deduct the 20% discount ($100), leaving $400, which still sounds pretty good. The fact is, however, that the discount should be applied directly to the net profit, not the gross revenue. After all, the usual costs of doing business still apply.

The true scenario is actually much worse than one would think. If your usual net income is about 30% of gross revenue (an industry standard for optometry), then a $500 gross revenue transaction would typically produce a net profit of $150 after expenses. When you deduct the $100 discount from this value (rightfully where it belongs) you are left with a measly 50 bucks!

You would have to see three patients like that one to equal the net profit from one usual and customary fee patient. Iíd rather see fewer people and make more money on each one. Looked at another way, if you dropped the discount program you could afford to lose two-thirds of the patient volume and still maintain the same net income. Lose only 50% of the patients and youíre money ahead.

Discounting your fees is an easy way to attract more people, but developing other competitive advantages is a far more profitable approach to marketing.

Best wishes for continued success,

Neil B. Gailmard, OD, MBA, FAAO
Chief Optometric Editor, Optometric Management