Most practices these days face the dilemma of threat and opportunity.
Relationships with insurance providers and other third parties can be useful, but often evolve from one or more of three assumptions:
- I can get many more patients in my practice by being a preferred provider;
- If I am not a preferred provider my patients may choose to go elsewhere;
- If I am not a preferred provider the insurance fund will take my patients somewhere else.
These are assumptions and for any given situation some or none of these may be true. Even if they do prove to be real threats, a solution is only helpful if it gives your practice a unique competitive advantage.
Practice owners should consider carefully and thoroughly, the relative power of suppliers, customers and other players in the market. Understanding market pressure, and what it means for YOUR business in YOUR MARKET is an essential part of planning and decision making, particularly when it relates to
your fundamental strategy, pricing and marketing.
The relationship between discount and profit is not well understood by those who are not in the accounting business. But believe me, discounts of any sort will affect your profit and cash flow in a big way… so anyone promising more patients in return for discount benefits had better deliver big time.
Let’s take a look at how it works:
The relationship is a cost-volume-profit calculation. You need to know your gross profit margin, the volume of unit sales, and the effect of discount on both. Assuming your gross profit is 70 per cent of sales and you discount by 20 per cent, you will need a 40 per cent increase in unit sales, just to maintain your gross profit dollars for that part of the business and that’s assuming nothing else changes. Additional income of any sort can be good once your fixed and variable practice costs are covered, but do you need to make price offers to get the extra work… and is there a cost associated with offering extra discounting to existing patients?
The Multiplier Effect
If patients change their behaviour and your average spectacle sale price also falls, this has a similar multiplying effect.
Most optometry practices have natural markets and these are, to varying degrees, limited in size by geography, competitors and consumer behaviour. To make discounting work, you will need a lot more patients, but if you are already busy, or your market is more limited than most, or you have competitors with the same offer nearby, how will you get these extra patients and sales?
This can be even more of a problem if your practice is in a regional area. In your market, it’s easier to count heads and competitors. You can even make a working calculation about how many people have particular private health insurances with extras. So where will the increase in unit sales come from, and how will your market position be affected?
Underpinning all of this is an understanding of what your patients want and why. If your ‘value proposition’ and product mix is already tuned to the market, things should be going OK anyway. This doesn’t have to be a stab in the dark. The information is there if you look and plan.
A Word about Strategy
Having set your practice strategy and tactics, hold fast and stick to it, but not in the face of the obvious. Constantly review and monitor outcomes and when something changes (as it certainly will) make an appropriate response.
Clever practices know that what works for one, may not always work for all. Adjusting strategy and tactics to
subtle market variations is an essential part of owning a small business, and applying someone else’s success in your area does not always produce the desired result.
So understand your practice, your market, your patients; plan, calculate and evaluate carefully before changing. And remember, increased return always means increased risk… so if you haven’t found the risk yet keep looking!
Mark Overton is a business consultant who specialises in working with independent optical practices. He has 30 years’ experience working in both public and private business. With both science and business qualifications he has worked with major public hospitals, Federal government, small and medium private businesses, medical research institutions, professional associations and has consulted to over 400 businesses across Australia and lectured at universities.