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HomemibusinessThe Fear Factor behind Discounting Partnerships

The Fear Factor behind Discounting Partnerships

When the owners of the Kosmac and Clemens independent practices took a breath, stepped step back and measured the impact of the partnerships forged with Private Health Funds, they soon realised the promised ensuing profits were flowing out the door, rather than flooding in… and the FEAR that had driven them to go into partnership in the first place was simply False Expectations Appearing Real.

Preferred provider arrangements with Private Health Funds are not new. In recent times they’ve been expanding in an attempt to include independently run businesses that represent a large segment of the
optical market.

For our five independent practices, the decision to participate in any of these preferred provider schemes was difficult. On one hand, there was a real or perceived threat, manifest as fear, constantly drumming in our minds – to be excluded from such discounting arrangements and marketing strategies for the benefit of our clients with particular Private Health Fund entitlements would spell certain commercial death in a super-heated competitive market. The fear that most of our competitors, particularly the multi-nationals, were ‘eating away’ at our business led us to believe we had no choice but to begin offering similar discounts in order to merely survive.

Should Have Known

If we were to stop for a moment and think rationally, we’d have reminded ourselves that even in the face of stiff competition, after over 20 years of running optical businesses we had a pretty good understanding of important concepts such as profit and loss, and what effect discounting has on the former.

The fear that most of our competitors, particularly the multi-nationals, were ‘eating away’ at our business led us to believe we had no choice but to begin offering similar discounts

There is no doubt the discounting mentality of multi-national optical outlets has caused a noticeable effect on our stores; if you throw enough noise and marketing money at the general public then a fair bit of it will stick, no matter what you say to the contrary… but what price should you pay to steady the tide?

Eventually our group made the decision to join two of the preferred provider groups; Australian Unity and VSP (AHM & Medibank). We decided to monitor the performance of referrals from these groups versus the impact of discounting.

Under the arrangements, we offered Australian Unity clients the option of 25 per cent off a complete pair of spectacles, or a no-gap pair. An intermediary group initiated direct marketing to fund members within particular exclusive geographical boundaries at our cost, and we paid them an additional percentage commission for each successful sale. VSP clients were offered an option of 20 per cent off all lenses and frames, 15 per cent off contact lenses, or a no-gap pair within three price categories (AU$149, $199 and $239).

VSP offered no geographical exclusivity and did not offer direct marketing specific to our practice. However they offered to direct market clients that did not purchase through a VSP provider in order to advise them they should shop elsewhere in the future.

How it Panned Out

We survived in the Australian Unity arrangement for over 12 months, but the greatest impact was felt under VSP, with whom we decided to discontinue our contract after just two and a half months. Across all practices the discounts given for that short period amounted to $22,000, which extrapolates to $106,000 per annum. There was also close to an 11 per cent increase in no-gap or ‘package-deal’ jobs, however we were unable to tag which of those were related directly to the health fund arrangements. In addition were the commissions and advertising costs.

When we surveyed our Australian Unity clients, many of them were already our personal clients and while they were happy to receive the marketing letter offering the discount, they would have shopped with us anyway. As for VSP, I am not aware of one single client who knew of the program; in other words, we were supplying significant discounts for no gain in client numbers via any marketing strategy. Not surprisingly, we decided to withdraw from these arrangements once we’d noticed severe cash flow shortages through our bank accounts and traced the majority of ‘missing’ funds back to the exponential rise in discounts offered.

When re-considering our options going forward, the question for us was simple; how could we attract enough new clients to make up for a profit loss of $106,000, an amount most likely to grow larger? None of our stores are in major shopping centres, and many of our clients were happily shopping with us anyway. The plethora of discounting options already open to them, either via multi-national discounters, other holders of preferred provider arrangements, or the internet, had not – and still have not – swayed these clients to shop outside our establishment.

The FEAR Factor

The claims made by operators of preferred fund arrangements, that Ulysses’ ‘Sirens’ would sing and lure away our clients, has not been a reality. The claim that money would flow like water requires the qualification of ‘in which direction?’

It is not surprising that fear was a motivating factor in our decision to be part of these programmes. These days I often refer to the word FEAR as an acronym for “False Expectations Appearing Real” after once hearing that definition from a well-known Australian motivational speaker.

Fortunately we decided to ‘test and measure’ the impact of the schemes and found that our FEAR was a little unfounded. Rather than attaching ourselves to a corporate discounting model, what was really required was an understanding of human nature.

While virtually everyone likes to spend less than they actually have to, there is a large group of people in the community who appreciate products and services that deliver higher quality and performance; and higher standards of service and care. Many like to wear products that are distinctive, use innovative technologies and drive high performance vehicles. If they didn’t, then these products would be relegated to the preserve of the very wealthy and disappear from mainstream life. We need to have trust in human nature and worry less about FEAR.

For over 20 years we have focused our business on offering high quality, performance oriented and innovative optical products. We have come to the realisation that while there are many in our community who require some financial assistance, (for whom there have been steps made to close the gap), many of our clients also appreciate what we have done and still do for them and the innovative optical products we provide.

The decision to opt out of these preferred provider arrangements has now fortified our strategy to provide products and services of distinction in order to set ourselves apart from our competition.

Horses for Courses

Having said all of this, the variety of practice scenarios that exist within the broad community necessitates the need for many different strategies. What is good for us may not be good for someone working in a highly competitive shopping centre environment. A practice currently struggling to win any significant market share due to extreme geographical competition may indeed find it beneficial to piggy-back onto Private Health Fund Marketing. But what is good for the short term may not be good for the long term and that really must be considered. If a practice can secure more discount conscious clients in the short term, in the long term many of these clients will have a tendency to be loyal to the dollars they can save, rather than the other attributes of your practice such as a unique service and eye care philosophy.

It is important to remember there is always someone out there with products that are cheaper than the ones you offer. But to merely follow the leader may see you wind up working harder to achieve diminishing profits over time; something we have become acutely aware of, having had over 20 years experience in this industry… and something we have just recently been reminded of again.

Edward (Ed) Kosmac completed his optometric training at the University of Melbourne in 1989. He opened the first of five practices in the Kosmac & Clemens Optometry group with colleague Ian Clemens in 1992. Since then the firm has focused on the visual needs of their communities and adopting a culture of excellence in the delivery of ocular health care. Ed has a particular interest in binocular vision disorders in school aged children, and contact lenses for the aging population.