By Jay Binkowitz and Evan Kestenbaum, MBA, dba Contributors
We can all learn a lesson about the recent trials and tribulations of J. C. Penney. Ron Johnson, formally an Apple executive, was hired as CEO to help J. C. Penney's turnaround. In 2012, he started a new strategy of bottom line prices, no discounts, no coupons, no nonsense. In 2012, sales dropped 25 percent, losing revenue and market share to its competitors. Subsequently, Johnson was removed from his position and given a seat on the board. (Don't feel bad for him; he now gets compensated $1 million per year.)
Overall, the no-nonsense strategy was a failure. A recent New York Times article by Stephanie Clifford and Catherine Rampell, titled
Sometimes, We Want Prices to Fool Us, explains the psychology that shoppers have today. It says "...most shoppers, coupon collectors or not, want the thrill of getting a great deal, even if it's an illusion."
Just because you think you have low prices, or you tell your customers you have low prices, doesn't mean they see the value. The article quotes Alexander Chernev, marketing professor at the Kellogg School of Management at Northwestern University: "J. C. Penney might say it's a fair price, but why should consumers trust J. C. Penney? At the end of the day, people don't want a fair price. They want a great deal."
Three Numbers Add Up To Comparative Value
This real life case study supports
GPN's long-standing philosophy of Comparative Value. Whether we're discussing frames or lenses, there are three numbers we must always tell the patients—the retail value (list price), the price they're paying, and their savings.
Think about your own practice. Do you hear the optician say, "Mrs. Jones, your glasses will be $300 today," or are they speaking in consumer friendly language by saying, "Mrs. Jones, the retail price of your glasses is $650, but you have a great plan (or in-office package), so your total is only $300. That's a savings of $350!"
All of your prices must be built to reflect this concept as well, regardless of the vision plans you accept. For frames, many practices still rely upon a three-times-wholesale mark-up formula. This formula is so old we don’t even know where it came from or why we use it. It was certainly before vision care plans had a large impact on our profitability. Today's market requires a new way of thinking about pricing frames—Minimum List Price and fair market value. (To find out more information on how to utilize this philosophy with lenses, read
Lens Bundling Drives Profits While Reducing Patient and Staff Confusion.)
By using Minimum List Price for frames that fall in below your normal markup strategy, it is possible to dramatically improve your bottom line, no matter which vision care plan your patient is using. In some cases, you can improve your bottom line by more than 40 percent.
Understanding Minimum List Price
What is Minimum List Price (MLP)? We know it costs money to have a frame available for sale as this refers to our operational costs. It costs x dollars to order the frame, to receive the frame, to unpack the frame, to show the frame, and to turn the lights on too. This overhead has to be accounted for in your pricing strategy. Using the philosophy of Minimum List Price, we acknowledge that it costs as much to sell a frame that has a wholesale cost of $80 as it does to sell a $15 wholesale cost frame. You need to account for this cost. Understanding that each market is different and that your Minimum List Price will vary, it generally falls between $159 and $219. So, even if a frame only costs you $30, it should be priced at your Minimum List Price. Remember that vision care plans don't dictate your retail frame prices. You can price your frames as you deem appropriate.
If the price is marked at MLP ($189), that does not mean you have to sell it at MLP. To be competitive, you can offer a time of service allowance in a special package, or a promotion for your private pay patients. When you do, be sure to show them the comparative value that they are receiving.
A strategy of Fair Market Value should be used for frames that are above your Minimum List Price. According to Merriam-Webster Dictionary,
Fair Market Value means "a price at which buyers and sellers with a reasonable knowledge of pertinent facts and not acting under any compulsion are willing to do business." Which means, price the products at a price that people will buy them. Let's consider the example below:
After an analysis at one practice, we found that they sold 25
Flexon frames per month. It was their bestselling brand by far. Based on the overwhelming demand, we decided to raise their Flexon price by $20. They sold the same amount of frames the next month but added $500 to their profit ($20 x 25 frames). The $20 increase did not negatively affect demand, therefore it was considered Fair Market Value.
It's important to understand the market value of different brands and test them in the marketplace. Remember, if your prices go too high and your sales drop you can always lower them. Pricing frames should be an organic process. Follow these simple philosophies and you will profit from your frame sales in today's managed care environment.
Jay Binkowitz, optometric business consultant, is chief executive officer and president of
GPN, exclusive provider of The EDGE.
Evan Kestenbaum, MBA, is chief information officer of
GPN, Exclusive Provider of The EDGE. Contact Jay and Evan directly at
clientservices.gpn@gmail.com.
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