business 101

Standard Markup? There’s No Such Thing

Gary Kaschak

There is a particular frame on my wallboard that sells for $150. It also sells for $90, $101, $105, and $120—and that’s for my customers who are fortunate enough to have one of the multitude of discounts we accept.

That very same frame also sells for $68, $77, and $83. Those prices are reserved for my customers who have one of the many managed care programs we accept.

YESTERDAY’S NEWS

I’m not whining about the abundance of discounts or insurances we accept, nor am I complaining about the apparent loss of revenue that comes with the territory. On the contrary, I embrace (well, maybe a little) these challenges, and have had really no choice but to conceive ideas and models on how to adapt to the all the winds of change in our capricious optical world.

All these “winds” make the arena of frame markup quite challenging. For those of us who have been around long enough to know, the old industry standard for frame markup—and I emphasize old—was cost (before discount) × 2.5.

While that so-called industry standard may have applied to how frames were priced a decade or more ago, it is unrealistic in most cases to believe that it still holds water in today’s managed care world.

Then, what is the standard markup, and how do we arrive at it? The answer to the first part is simply this: There is no standard markup.

FINE-TUNING FORMULAS

I spoke with a frame rep recently about this subject and asked how some of her accounts priced out frames. The answers she gave me were as vast and varied as her territory, and really got me thinking more about this subject.

Most stores mark up from either the book price (list) or the actual (invoice) price. My approach has always been to combine both sets of numbers, and here’s why.

ENDLESS EXCEPTIONS TO THE RULE

I have experimented with my own formulas a few dozen times over the past decade, tweaking and fine tuning until it seemed to be just right. But the more I tinkered and seemingly perfected just the right formula for my stores, the more I discovered that even with a formula created over time, there would always be exceptions to the rule. Plus, many external factors we face—such as unemployment in an area, saturation of competition, or loss of a third-party plan—could greatly affect how frames are marked up. While these external factors have a big bearing on how anything is priced, it is at this point that you learn to adapt your pricing to the situation at hand.

LIST PRICE APPROACH

Let’s take two frames, both list priced at $70 but far apart in the actual cost paid, and calculate pricing based on list price. Frame A, a recognized designer name, has a discount of only 10 percent, while Frame B, a house-brand designer, has been discounted 40 percent.

Let’s say your markup formula is 3.5× list, which means both frames would be priced at $245. However, it makes no sense to price the two frames equally.

INVOICE PRICE APPROACH

Let’s take the same two frames and base a 3.5× markup on actual price paid.

■ FRAME A: $70 cost at 10 percent discount = $63 × 3.5 markup = $220.50.

■ FRAME B: $70 cost at 40 percent discount = $42 × 3.5 markup = $147.

VENDOR-DISCOUNTED APPROACH

While the previous formula certainly seems more realistic on paper, there’s a problem: It does not enable you to capitalize on the 40 percent discount you have been given by this particular vendor.

Here, then, is a modified version of my formula using 3.7× as the preferred markup.

■ FRAME A: $70 list + $63 invoice = $133 ÷ 2 = $66.50 × 3.7 markup = $246.

■ FRAME B: $70 list + $42 invoice = $112 ÷ 2 = $56 × 3.7 markup = $207.

In this final scenario, your lower-discounted frame prices remain about the same. However, the frames you got at a greater discount, while still far below the designer price, bring you a greater discount than before—$60 more per frame, in fact. It’s one that makes more sense, too.

Any frame markup formula needs to be modified for categories like budget eyewear, higher-end frames, and sunglasses. However, this formula I presented will most likely cover your core frames.

Give this tried-and-true formula a try. It’s easy. EB

Gary Kaschak has spent 35 years with Sterling Optical and has written three novels.