I recently received an email from an optometrist who raised a good point. He writes: "One topic that I have not seen discussed thoroughly is what percentage the cost of goods sold (COGS) should be in a medical eye care practice. Specifically, my practice professional fees are about 50% of my gross and eyeglass and contact lens sales account for the other 50%. My COGS has been 22-25%. How does this compare to the traditional 27-32% COGS in a more typical optometric practice? Also, where should the net be?"
Practices that specialize
This reader is correct that there is an absence of national data about specialty optometric practices. We have good expense category data about general optometric practice from professional organizations and industry sponsored research programs, but not much for practices that are not so traditional. A practice that does a great deal of medical eye care is mostly service oriented and sells relatively few products. The same is true with vision therapy practices.
A practice that is mostly service based will have lower lab bills, but how does it affect profitability? It's nice to not have a lab bill, but these practices also miss out on the optical sales. Is medical-only more profitable than a mix of medical and optical?
Comparing with traditional norms
It would be great if we had data for specialty practices, but we must also realize that there is a continuous range of specialization. How would one practice qualify to be included in the mostly medical group? In fact, there are practices all along a range from entirely medical eye care to some medical eye care to zero medical eye care. Interestingly, one way a practice could judge how much medical eye care it is doing is by examining how it deviates from the traditional optometric practice. So the standard data that we have available still offers some benefit.
In the example the reader sent in his email above, we see that 50% of his gross revenue is from optical and contact lens sales. It would be interesting to see how those two components break down, but many experts have considered 50% of practice gross to be a typical amount derived from optical sales alone. A more recent large study showed the median practice to have 44% of gross from optical product sales and 16% from contact lens product sales, so the total for both these groups is 60%.
Our example practice has less income from product sales of about 10% - indicating that it indeed could be more medical. But it could also be under-capturing its eyeglass and contact lens Rxs. We really can't tell from these figures alone.
The example practice has a COGS of 22 to 25% of gross, which is definitely lower than the usual norm of 30%. This makes sense for a practice that is strong in medical eye care, because more income is generated from exams and diagnostic procedures, but we also see it in traditional practices that belong to a very effective buying group or have an in-house surfacing and finishing lab.
Treating optical as a separate business
What this all points to is the need for a change in our usual approach to profit and loss statements for optometric practice. For decades we have kept it simple by adding all income together and assigning all expenses to that income, but I believe a better way may be to treat the optical dispensary as a separate business. Consultant Jay Binkowitz has recommended this approach for some time and he makes a compelling case. Separating the retail and professional divisions of the practice will help us understand so much more about profitability. It is quite possible that your optical is subsidizing your clinic or vice versa. Each entity should be profitable on its own. Another advantage is that practice norms can be developed that are more meaningful and comparable.
It is fairly easy to track the income from optical as a separate entity, but the expenses to apply to optical are not so easy. We will have to come up with a formula or method to break down each expense category into a prorated share for the clinic and optical. Jay has a nice system for this, but basically you will analyze the office space and the staff time that is used by optical or by the professional practice and split them accordingly.
The entire eyeglass cost of goods is now applied to just the optical gross, not the whole practice gross, so the COGS expense as a percentage will now be much higher.
Where do contact lenses go?
Contact lens income and expense presents a bit of a dilemma that I'm not sure how to handle and I welcome your comments by email. Contact lens fitting is largely doctor driven and there is a large clinical service component, so many would say those fees and costs belong on the professional side. On the other hand, we sell contact lens products and that creates a cost of goods sold, so maybe that part is retail and should be considered part of the optical dispensary. We could place contact lens services on the clinic side and the product sale on the optical side, but maybe that divides this area of the practice too much.
Please share your data and thoughts
I'd like to know if separating optical and clinical P&L statements is very common in our profession, so if you do that, please drop me a message to let me know. I welcome your comments on how you break out expenses for each side and how this approach helps you manage your practice better. What is a typical net percentage for the optical and clinical side if tracked separately? And where should contact lenses go?
Thanks for your help. I'll report back.