By Johnna Dukes, ABOC
We’ve been talking about owning your own optical business and some general concepts about what and why, but today I want to address a more technical component of business ownership, (so hold on to your hat, this one is kind of a biggie)… profit.
Let’s look at the word itself. Profit is the money left after everything else is paid. So profitability boils down to making more than you spend. Fairly easily said, becoming profitable is a two-part equation: pricing your items correctly and controlling your cost of goods.
One of the most common questions I encounter is “How much should I mark up my products?” To which I answer, “Well, how much profit do you need to make ends meet?” In order to understand how much markup you need for your products, you need first to understand what your costs are for doing business. Yes—rent, utilities, payroll, advertising, legal, accounting, insurance, postage, office supplies, etc. What do you spend money on monthly, and what are those costs? Get yourself a number and then let that help you determine two things: 1. At what price do you need to buy your products? and 2. What should your markup be based on that information?
Let’s say you’ve determined that you need approximately $5,000 per month in order to pay your ancillary business-related expenses. Great, step one achieved. Now, let’s think about how many jobs you hope to sell per month. Let’s say you’re just starting out, and you hope for 30. Divide one by the other, and that tells you that if you hope to sell 30 pairs of glasses per month, you would need approximately $167 per job of profit in order to make ends meet.
Next we need to figure in how much your cost will be to make this job, and finally we probably want to make more than “just enough” to make ends meet, so you will want to take that into account when deciding what your pricing needs to be.
So let’s say that your cost on a frame is $60, and your costs on lenses are $140 for a total of $200 plus the $167 you need to make ends meet. That means your minimum retail pricing for this product needs to be $367. So if you divide $367 (total price) by $200 (materials cost) you get 1.8 (round up to 2). You need to mark up your products by at least a factor of 2 times. Considering that not every lens you order is the same, some will cost less (SV lenses) and some much more (PALs) so while this markup equation is helpful to ballpark pricing, it isn’t an absolute.
For example, consider the frame is still $60, but now your lens cost is $80, so your cost involved is now $140 plus the $167 you need to make your profit goal. That makes a cost of $307, divided by your materials cost of $140 is 2.19 or 2.2 times. So in this case, just taking cost by a factor of two times won’t cover your profit needs. The goal of going into business isn’t just to “make ends meet” and what happens if some months you don’t make 30 sales? In this case you have two options, adjust your markup to 2.5 times or 3 times (if your immediate market will bear it), or consider finding a way to decrease your costs.
Let’s discuss your immediate market area. If you’re among competitors who are priced similarly, and you find that your pricing needs to be higher in order for you to meet your profit goals, you either need to offer products they don’t carry (and then the price you charge doesn’t matter because it isn’t an apples-to-apples comparison), or you need to find a way to obtain your products at a lower cost. Maybe this involves joining a buying group, or speaking with your lab to see if you’ve met your max discount, or maybe you need to consider carrying different frame lines for which you can set the value. (One I happen to love is the self-branded eyewear concept—this way you’ve created your own brand and can charge whatever you deem appropriate for it.)
Taking these things into consideration will give you a lot of information about you to build your most profitable business!