How To Mess Up Your Profitability
One sure way to mess up the profitability of your business is to rely on discounting your products and services to increase sales.
Discounts come in two basic forms:
The charity discount – usually given to pensioners, friends, and anyone else who asks for it.
The competitive discount – Given as a result of actual or perceived pressure from competitors and patients about price.
Make no mistake, discounts will cost you heaps. The table below shows the impact discounts can have on your profitability.
If you discount by 10% and your Gross Profit Margin is 70% (most practices are around 70 percent), you will need a 17% increase in unit sales to maintain your Gross Profit dollars. That’s a 17% increase in the number of spectacles sold…just to stay where you are.
If you don’t get this increase it will be money straight out of your pocket.
Think about it. On an annual turnover of $450,000 your sales need to go to $540,000 just to make the same money at the end of the day!
Inevitably you will give some discounts but consider the following tips.
1. Set a discount policy that the practice will follow and stick to it
2. Ask for proof of eligibility for the discount
3. Discounts are a privilege, not a right. You do not have to give them.
4. Stand by your product and service. You provide the best optical care and eyewear. You are entitled to ask a reasonable price for it. If your patients do not want to pay as much offer them a cheaper alternative. This will at least maintain your profit margin.
5. Emphasise quality not price, when communicating with patients. Most people will pay a higher price for quality if the benefit is there.
6. Consider carefully before entering into agreements with third party payers such as Health Insurers and employers who are asking for substantial discounts. Do the sums and find out how much money you will really make.
If you are unsure and need some more advice contact Ideology Consulting or your accountant/financial adviser.