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MARKUPS: Formulas or Flexibility?
A look at the methods ECPs use today—and a breakdown of the best ways to price your products
By Erinn Morgan
Markups are defined as "a percentage added to the cost to get the retail selling price." While this sounds simple, there are a variety of formulas that can be used to markup retail products.
The end goal with markups is to realize your maximum gross margin while remaining competitively priced in your marketplace."I am visiting people's practices every week and I see that everybody is doing it pretty much the same—marking product up double plus 10 percent, double plus 20, or double plus 30," says Richard Kattouf, OD, founder and president of Kattouf Consulting Services.
Some choose to take a simpler route and follow MSRP. "I always use the manufacturer's suggested retail price," says Dave Doebler, owner of Eyepeek in Lake Placid, N.Y.
Historically, ECPs have used the same markup on all products, from expensive lenses and frames to bargain ones. But new thinking lays rest to the formulaic approach and looks at the bottom line, and what the market will bear for a product, instead.
"I have no real set formula for lenses," says Daniel Knighton, vice president at Knighton Optical, a chain of 10 stores in the Salt Lake City area. "It's about what the market will bear."
Can you make more profit marking up an expensive item two times than marking up an inexpensive one three times?
INDUSTRY COMPARISON: Look at a retail industry, like clothing," says Kattouf, who notes that just like any fashion industry, an expert like the frame buyer looks at the product and determines how much it will bring in the marketplace.
"If the buyer says it will bring $200, and the frame only cost $20, then by all means mark it up to $200. You'll be making more money than if you used the double plus 20 formula," Kattouf says.
Which method is right for you and your business? Here is a look at a few different markup approaches.
USING A MSRP
Many ECPs choose to follow the manufacturer's suggested retail when pricing their frame products. Doebler notes that he follows the suggestions with the following formulas.
MSRP FORMULAS:
* For most products: 3X markup.
* Sunwear: 2X markup.
"Even if I get a 10 percent discount because of volume or special programs I am doing with a supplier, that's just icing on the cake," he adds.
In some instances, especially with higher-end sports sunwear, using a manufacturer's suggested retail pricing is a prerequisite for carrying the line.
"You have to go by their suggested retail pricing or you lose the line," says Robert Stratton, president of Chester County Opticians, a group with five locations in southeast Pennsylvania.
| High End, High Profit |
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The idea of flexible markups can really come into play with high-end frames, where a formulaic approach can make a frame unaffordable—and less likely to sell. "There are some high-end things that we're probably not going to go the full formula on," says Robert Stratton, president of Chester County Opticians. "At the high end, if you do a three times markup and put a discount on it, then people think they're getting the extra value." |
USING A FORMULA
Others choose to follow a formula using the cost price. "Most ECPs use a multiple of the published cost for frames," says Al Cleinman, president of Cleinman Performance Partners. "However, it is important to remember that many vision plans actually dictate pricing as a multiple of cost."
At Knighton Optical, president/owner Lynette Knighton uses the following variety of formulas.
INDEPENDENT FORMULAS:
* General: Take the book cost and mark it up 2.5X."
* Accessory cases: To increase margins, Knighton has her own eye-glass cases manufactured. "We still have the same markup on this item but we can offer a lower price to the consumer," she says.
* Cleaners: 3.5X markup. "Because I can cut out the middleman here, too," Lynette Knighton notes.
INCREASING TO DISCOUNT
Some ECPs have also decided to take a formulaic approach to increasing their markups for many reasons.
"These days, everything needs to be discounted—people want to go where they can get a deal," says Gary Sheer, president of Alvernon Optical, which has seven locations in the Tucson area. "Chains use print media to pinpoint budget-conscious customers. If you're a local OD, how can you compete with that?"
DISCOUNT FORMULAS:
Alvernon increased its markup structure from 2.5X to 3X wholesale cost. "But it's back in that original ballpark once it's been discounted," adds Sheer.
BONUS PLAN:
Alvernon also boasts an in-house discount program for frequent buyers. "Optiplus is a discount program for good customers who frequent the store," he says.
Some ECPs use a formula, but veer away from it in special instances. "We do suggested list on everything, except on some of the things we import directly from Germany," says Tom Benthien, OD, owner if the Chicago-based Eyelines. "We mark those up more because of customs issues."
FLEXIBILITY PRICING
Other ECPs mark up items depending on what the market will bear for each product.
"For frames, we recommend our clients price based upon perceived value and their desired positioning in the market," says Cleinman. "Wholesale cost has little to do with perceived retail value."
MARKUP FACTORS:
Kattouf suggests that ECPs can figure the retail value of a frame by looking at things like:
- Hinge design
- The quality of the finish
- Detailing
- Style and color
"That's what merchandising is all about," he says. "You want an expert's opinion like the doctor or an optician who has a lot of experience in frame purchasing and what consumers want. I also tell independent doctors to try to shop the competition a little bit as well."
A similar flexible pricing methodology can apply to lenses. "I have an amount I like to make on lenses. And I get a fairly high markup on single vision lenses, but I can't get the same markup on high index lenses," says Daniel Knighton. "I have to stay competitive and affordable."
Still, markups on lenses soar higher than those on frames.
| The Other Side—Markdowns |
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| On the flip side of markups lies a technique savvy retailers use to move products out the door: markdowns. "if the frame's been here for a year or so we'll try to mark it down to get rid of it," says Tom Benthien, OD, owner of Eyeline in Chicago. "We do 15 percent off after a year, and a third off after two years. A lot of times now when our rep comes in we decide to run frames at half off instead of returning them. That's been pretty popular." In an industry rife with returns, many suppliers are also offering discounts to those ECPs that buy their product without an open-ended return policy. "Things are changing," says Robert Stratton, president of the five-store Chester County Opticians. "There used to be a time when you could return everything. As long as you could get a full exchange, I would rather bring in new product and exchange it at full price than do markdowns. But all manufacturers are giving incentives not to do that. They charge a restocking fee or give an incentive when you purchase." Thus, he notes, there will be some product that this chain will mark down and others they will not. Others choose to take markdowns, and moving frames, into their own hands. "We have a select area of drawers, and anything in there I put a flat discounted rate on. At this point, I am tired of looking at it, I want to move it, and I don't want to be sitting with stock." |
LENS MARKUP:
* About 5X for Knighton. "If I take a single vision plastic lens with scratch coating, I average a 92 percent margin on this product. That is a raw material price, but we do have value-added to that with processing."
MANAGING MANAGED CARE
Marking product up to run sales and promotions is no new strategy, but some ECPs are also employing it to combat insurance markdowns.
"There are so many contracts based on insurance discounts, and we have to mark the retail down 30 percent," says Lynette Knighton.
INSURANCE MARKUP:
* Knighton is considering a change to a 3X markup for frames to offset insurance discounts. "Where we don't get manufacturer discounts, I might bump it to three times, but on the ones where I do, I might not."
In a market squeezed by managed care and competition, there is a call for both formula and flexibility in pricing eyewear. But remember to remain competitively priced.
Doebler notes: "If you open up The New York Times and see a sunglass at Neimans or Barneys for $250, well, you can't be getting much more for it than that in your optical shop." EB
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