In an optometric practice, measuring the average price per frame (sometimes referred to as the Average Sale Price or ASP) is not just a metric but a critical indicator of both the financial health of your business and the alignment of your pricing strategy with market demands. The Average Price per Frame gives insight into how effectively your pricing meets the expectations of your patient base while maintaining the necessary profit margins.
According to VSP, the national average usual and customary charge (U&C) for a frame in the U.S. is $230, a figure that represents a broad spectrum of demographics and retail models. However, your practice may serve a specific niche or demographic that deviates from this average, making it essential to tailor your pricing strategy to your unique patient base.
The Impact of Frame Pricing
The optical industry’s pricing strategy is more complex than other retail sectors due to the interplay with insurance reimbursement formulas. Unlike straightforward retail pricing, where margins can be controlled through direct markup strategies, the optical industry must navigate the intricacies of insurance contracts, which often dictate both the minimum and maximum reimbursement rates for products like frames. A misstep in pricing can lead to significant financial consequences. If your prices are set too high, you risk alienating uninsured patients, reducing your capture rate, and losing potential revenue. Conversely, setting prices too low can result in insurance reimbursements that don’t cover the cost of goods, eroding your margins and profitability.
The challenge lies in finding a pricing strategy that maximizes both capture rate and profitability while staying compliant with insurance guidelines. Many practices fall into the trap of simply increasing prices and offering discounts to uninsured patients. While this might seem like a straightforward solution, it carries risks. Insurance companies have a strict definition of “usual and customary” (U&C) pricing, referring to what is typically charged for a product, irrespective of insurance. If your reported U&C prices are inconsistent with market norms, you may face scrutiny or even fail an insurance audit, leading to financial and reputational repercussions. Therefore, a focused and well-considered pricing strategy is essential for maintaining both compliance and profitability.
Maximizing Markup Strategy
To illustrate the impact of pricing strategies, consider the following example: many insurance plans are designed with the expectation that frames will be marked up by approximately 2.6 times their wholesale cost. Let’s compare two pricing strategies for a frame with an $80 wholesale cost under an insurance plan offering a $50 wholesale allowance and a $130 retail allowance.
| Markup | Insured Out-of-Pocket | Uninsured Out-of-Pocket (U&C) |
|---|---|---|
| 2.6x | $62.40 | $208.00 |
| 3.0x | $88.00 | $240.00 |
In this scenario, the uninsured or “private-pay” sales generally offer a higher margin, making it crucial to evaluate how your pricing strategy affects both insured and uninsured sales. The impact of your strategy will vary based on the demographic makeup of your patient base. In areas with higher median incomes, your practice may sustain a more aggressive markup strategy without negatively affecting your capture rate. Conversely, in lower-income areas, a steep markup might deter patients, leading to lost sales. Thus, your pricing strategy should aim to balance achieving your pricing goals with maintaining a healthy capture rate.
Manage the Metric
Effectively managing your pricing involves considering several factors: your sales strategy, patient demographics, and the typical insurance plans in your area. Different offices adopt different strategies for marking up frames. Some opt for a flat percentage markup across all products, ensuring simplicity and consistency. However, this approach can sometimes lead to pricing disparities, where lower-cost frames are marked up too much, and high-end frames too little, alienating both ends of the market.
To address these challenges, many practices adopt a sliding scale markup strategy, which adjusts the markup percentage based on the frame’s list price. For example::
| List | Markup | Retail Level |
|---|---|---|
| $40 – $50 | x 3.5 | $140 – $175 |
| $51 – $75 | x 3.0 | $153 – $225 |
| $76 – $100 | x 2.5 | $190 – $250 |
This approach allows for better margin protection across different price tiers while offering more competitive pricing on higher-end products. Implementing such a strategy requires ongoing monitoring of your capture rate to ensure that pricing changes do not negatively impact sales.
Another critical factor in managing your pricing is your purchasing strategy. The types of frames you choose to stock will have a direct impact on your Average Price per Frame.. If your practice tends to shy away from luxury frames, your pricing average may naturally skew lower, which could signal a missed opportunity for revenue. On the other hand, if you do stock high-quality frames but find they aren’t selling well, it might indicate a gap in your staff’s ability to communicate the value of these products to patients. Proper training in brand storytelling and value communication can significantly boost sales of higher-end products.
Minimum List Price
The strategy of Minimum List Price (MLP) is another addition to your pricing strategy that can create a sort of “safety net” for your practice. This is implemented as a minimum amount for which you sell any frame. Under MLP, you price products for the higher amount of MLP or the result of the pricing markup formula. For instance, if you have decided to implement an MLP of $169, then any product which would sell for less than MLP under your current markup formula is marked for sale at $169. Products which price above the MLP under the markup formula keep that higher price. This doesn’t necessarily change your higher-value or premium products, but it helps to improve performance among your value or budget products.
Understanding your patient demographic is also crucial. Different demographics may have different expectations and spending capacities when it comes to frames. By aligning your purchasing strategy with the preferences and financial realities of your patient base, you can optimize your Average Price per Frame and overall revenue.
Expected Outcome
Regularly monitoring this metric allows you to identify and respond to trends within your practice and among your patient demographic. As you become more attuned to these trends, you can refine your pricing and purchasing strategies to better meet the needs of your patients while maximizing revenue and profitability. Average Price per Frame is not a one-size-fits-all metric; it will vary depending on your practice type and patient demographic. Your goal should be to achieve the highest possible average without significantly reducing your capture rate. By doing so, you can ensure that your practice remains both competitive and profitable.
Understanding the relationship between Average Price per Frame and capture rate is vital for minimizing the occurrence of lens-only sales or the use of the patient’s own frames. The next article in this series will explore methods to manage and improve your capture rate, offering strategies to keep patients purchasing complete eyewear packages from your practice.
