An Optical Erosion
Increasing retail competition from discounters and managed care markdowns have caused a concerning erosion of margins in the optical business. In the face of this challenge, what is the optical retail markup mentality? A look at how ECPs and other retailers structure markups to pursue the best profit margin
By Erinn Morgan
Illustration by Jon Krause

Today, some independent retailers in categories from clothing to eyewear still take the simple route with a standard markup on all their products. "I believe the average is about 2.7 times markup in the optical industry," says Tim Fortner, chief of ophthalmic services at Southern College of Optometry in Memphis and a partner in Streamline Communications.

Department stores and chains vary markups by product category. "They take a higher markup on private label items so they can take lower markup on designer goods to be competitive," says Doreen Burdalski, program coordinator for the Fashion Merchandising program at Philadelphia University.

Within the optical dispensary, there are a few categories that often get a markup different than the standard. "On lower-priced products, like a single vision lens, there is a large markup," says Fortner. "That is a profit center for a lot of practices."

Accessories are another area that can withstand a larger markup. "Some even quadruple the markup for accessories," says B. Dale Shannon, LDO, owner of Classic Eyes in Ocala, Fla., who also runs a national doctors' consulting business. "If you have an inexpensive product, you can mark it up quite a bit. You may buy a cord for $2 and sell it for $8 to $10. A small item like that can pay an employee's salary over the year."

With margins squeezed by market factors such as competition from chains and managed care discounts, ECPs are looking for an added edge to increase their profits.

How can dispensers structure their markups to ensure survival in a hostile environment? The first step is in understanding the challenges.

MANAGED MARKUPS

One of the biggest issues whittling away margins for ECPs today is managed care. "Most insurance companies are taking a third to a half off the top of the eyewear retail price, so it is forcing dispensers to take a higher markup," says Shannon.

To stay alive, dispensers have to mark their frame and lens products up more.

On the other side of the optical profit vise are chain stores and mass merchants.

Behemoth retailers have helped change the rules of the game in eyewear. "Big box retailers are the reason for the change in markup structure over the years," says Patti Freeman-Evans, a retail analyst for Jupiter Research.

CRUNCHING THE NUMBERS

The first step in deciding on your markup is examining local market factors, including what the market will bear.

There is a mathematical calculation that many retailers use to figure markups. "It includes the profits you want to make, the markdowns you plan to take, and the cost of goods," says Burdalski. "It is important to build a buffer into your markup planning for reductions on product that doesn't sell."

According to Start Your Own Business, a book from the staff of Entrepreneur magazine, the gross profit on a product is computed as:

Sales - Cost of Goods Sold = Gross Profit

Remember, however, that the cost of goods sold includes factors ranging from wholesale cost and shipping to rent and markdown costs.

"Pricing narrows down to three Cs," says Burdalski. "The cost, the competition in your area, and the customer you are trying to attract."

On the customer front, retailers should consider what local consumers are willing to pay for products. "Are you going after lower-, middle- or upper-income families?" asks Burdalski. Other factors, such as exclusivity and designer merchandise, can justify a higher markup.

Through all of your markup planning, don't forget that you still have to look at the big picture of your practice. "You have to offer the customer a different experience rather than comparing prices. It is a brand, service, and management scenario of maintaining margins when competing with the giants," Freeman-Evans says.

Retailers have to focus on price, quality, or service, Fortner suggests. "Of course, every customer wants the best product and the best service at the lowest price," he says. "But you can't deliver all of these or you'll go broke."

Fortner suggests ECPs focus on where they differ from mega-chains—quality and service—while taking a higher markup. But dispensers need to justify higher prices.

"It's not just about taking a higher markup," Fortner says. "Can you explain the value of what you provide? I have to prove to that person that I am relevant to them and their well-being."