Optometric Management Tip # 411   -   Wednesday, December 30, 2009
Is a larger practice better?

My last two tip articles have focused on how to build a large practice, but a couple of colleagues pointed out to me that not everyone wants a large practice. Of course this is true and I hope I didn't give the impression that everyone must strive for a mega-practice. I think each practice owner should chart his or her own career course. One doctor told me he wishes now that he had set a goal for his practice to gross $400,000 per year and net 40%.

The bigger problem that I see is with practice owners who have no market strategy at all. It turns out this is the case with many ECPs. Many doctors just jump into practice ownership without ever thinking about what they want it to become. We can simplify the possible market strategies into four quadrants as follows. Consider each of these practice types and decide which one you would rather have.

Large gross revenue with a small net percentage

This business strategy can actually be extremely effective because willingness to accept a lower profit margin can drive huge sales. Wal-Mart is an example of a company that does this very well. Their low prices create huge sales volume and even with lower margins the company makes a huge profit. The problem with this market strategy for most ECPs is that Wal-Mart and others do low price optical so well that is hard for an independent to compete on that basis. Some regional optical chains have managed to succeed in the low price arena, however.

It is worth noting that some large independent practices have a low net percentage due to a very large and highly paid staff, a large facility or advanced instrumentation. To some, that could still be a great way to practice and the net could still be very good in dollars because the gross is high. A $3 million dollar practice with a 20% net is still netting $600,000 before taxes. For clarification: the salaries of employed ODs are typically considered part of the practice net income, but obviously it's not part of the owner's personal income.

Small gross revenue with a large net percentage

This is the goal that was described by the doctor in the first paragraph. The concept is that the doctor can see fewer patients, keep overhead costs low with a smaller office and have fewer employees to manage. There is truth in the philosophy that net income is all that matters. In the example of the $400,000 gross with 40% net, the practice net income would be $160,000 before taxes.

I'll admit that the $400,000 gross would be fairly easy to achieve and if one could do it without vision plans, the net percentage could be high. The main problem I see with this strategy is that the doctor must do nearly everything. I doubt that it can actually be a way to work less. All income and most decision making depends on the doctor and there is really no hope of every escaping it. The doctor may see fewer patients but each one takes much longer and there is still the practice administration to handle. And while it may seem like staff management would be easier, it can be very stressful when you have two employees and one of them calls in sick or quits suddenly.

Large gross revenue with large net percentage

This seems like the ideal strategy to me! The primary goal of all businesses is to generate profit for the owners or shareholders. It may seem like this practice would be hard to achieve, but I see no downside in trying. And it is really not all that difficult to achieve if you apply sound business principles. Net percentages are usually higher for larger practices because of economies of scale and better buying power.

Some advantages of the large practice are:

Small gross revenue with small net percentage

This is probably the one strategy we can all agree that no practice owner wants!

I can envision a large practice where the doctor is killing himself with long hours and is up to his ears in debt, but it would be inaccurate to paint all large practices with that broad brush. Equally inaccurate is the assumption that a small practice can't produce a good income and lifestyle for the owner. In the end, it comes down to how happy the practice owner is, and that factor definitely belongs in our definition of success.

Best wishes for continued success,

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