Optometric Management Tip # 50   -   Wednesday, January 01, 2003
Elasticity of Demand

If you took an economics course in college you learned about elasticity of demand - but it may be one of those academic theories that is quickly forgotten after the final exam. This economic concept does apply to optometric practice, however, and it may be especially helpful if you are thinking about raising your fees, or dropping an insurance plan (which is like raising your fees).

Without going into the mathematical formulas that are used to calculate elasticity of supply and demand, just think of it this way: if you raise your fees, and no one complains or stops coming to see you, the demand for your services is inelastic. It is good for a business to have inelastic demand, because it means that you could raise prices and most people will still buy from you. This may seem confusing because the well-known law of demand says that when the price of a good rises, the quantity demanded falls. While that may be generally true of a commodity, like sugar, it may not be so in eye exams. Elasticity of demand asks the question... if you raise prices, to what extent will demand drop?

In my experience, many optometrists enjoy fairly inelastic demand. I have often raised fees and found that no one seems to notice and demand for appointments remains as strong as ever. This is what we all work for when we try to build strong reputations for high quality, and when we develop strong patient loyalty. We work toward building a situation where the exams and eyeglasses we provide are not mere commodities.

The following factors influence elasticity of demand:

• Availability of substitutes. The stronger your competitive advantages are over other eye care providers in the marketplace, the higher you can successfully raise your fees.
• Time. Generally, the more time the consumer has to make a purchase, the more elastic is demand. Patients often need eye care quickly.
• The price of the good, relative to income. Very high priced goods, like a house or a car, are very elastic to demand, since even a small percentage price increase of these items could reduce our ability to buy them. Items that are dispensable luxuries are also pretty elastic, since we could simply do without them. Eye care and eyewear are not extremely high priced goods, but they're not real low either. And while eye care is not a luxury in one sense, but a medical need, in another sense, high-end designer frames and laser vision correction could be considered a luxury.
Of course, there is a point where fees could be set so high that demand will become elastic, and drop like a rock, but I think most optometrists are not even close to it. Try experimenting with your fees and see if you see a negative reaction. After all, you can always switch them back to the previous level.

Best wishes for continued success,

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