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What’s “Normal” for Cost of Goods Sold?

by | Apr 20, 2024

The wholesale cost of the products your practice sells—glasses, contacts, and other accessories—is a frequently discussed topic in optometry. Like most expenses, lower is better. But what’s realistic? I have heard more than one expert mention a cap of 25% of revenue as a norm. Let’s look at what Books & Benchmarks clients spent on their materials last year. 

Define, then measure 

Before looking at the results, let’s consider what’s included in the Cost of Goods measure. It includes costs like Frames, Optical Lab, Contact Lenses, Optical Supplies, and Accessories (the things you sell). 

Rebates, which are essentially delayed discounts, are booked against wholesale costs. And we include buying group or alliance fees in the number as well. Alliances often provide additional services like consulting as part of the membership, but most practices join an alliance or buying group to lower the Cost of Goods Sold. 

Among the 89 practices reporting into Books & Benchmarks in 2023, the Cost of Goods Sold as a percentage of revenue varied widely, from the low teens to forty percent! The idea that there’s a tight range that every practice should aim for isn’t reflected in the data. 

The middle 60% of Books & Benchmarks clients spent between 24% and 32% of gross collected revenue on materials. Only 20% of the practices we serve had COGS under 24% of gross revenue (collected). 

The other interesting note is that the distribution is almost bimodal, meaning it clusters around two different values: 23% and 31%. Based on our experience, practices focusing more on medical care tend to have lower COGS while those leaning toward retail have somewhat higher COGS. There tends to be a corresponding increase in staffing in medical practices, so it’s not necessarily cheaper to go the medical route. 

Managing COGS

There are proactive measures you can take to manage COGS, like using an alliance to access better discounts, negotiating directly with your vendors, spot-auditing your bills at a regular cadence (two to four times a year), and actively managing your frame inventory. 

But keep in mind that the Cost of Goods Sold depends on many other activities in your practice: pricing structures, fee schedules, revenue cycle management (how you get paid by insurers and vision care plans), etc.  

Being mindful of how you purchase frame and contact lens inventory, along with being proactive about pricing, will impact your COGS. However, it’s important to note that your expense ratio is more a reflection of your overall revenue mix than of how well you control costs. 

Want to automatically track your Cost of Goods Sold and other financial benchmarks? Books & Benchmarks is the answer! We support ODs by combining professional optometry bookkeeping services with automated benchmark reporting. Schedule a discovery call and learn how we can streamline your financials and provide you with the insights you need to make smart decisions for your practice. 

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