Episode 118 Transcript – Adding Private Label to Improve Margins Without Compromising Quality with Dr. Chad Fleming

[00:00:04] Intro

[00:00:04] Hey, everybody. Welcome back to the Optometry Money Podcast where we’re helping ODs all over the country make better and better decisions around their money, their careers, and their practices. I am your host, Evon Mendrin, Certified Financial Planner(TM) practitioner, and owner of Optometry Wealth Advisors, an independent financial planning firm.

[00:00:24] Just for optometrists nationwide. And thank you so much for listening. Really appreciate it. On today’s episode. I welcome back to the podcast, Dr. Chad Fleming.

[00:00:35] And we talk about the benefits of adding private label products financially to the practice. For your patients. We talked about how a practice owner can select or create a private label line. And red flags to avoid when doing so and so much more.

[00:00:50] And if you have any questions, you can reach out to us here at podcast@optometrywealth.Com. I will throw all of Dr. Fleming’s contact information and all the other links and resources mentioned here in the show notes, which you can find at the education hub at my website, www.optometrywealth.Com.

[00:01:10] And while you’re there, check out all of the other resources, articles, podcasts, episodes we’ve done. And if you’re curious about what it’s like to work with Optometry Wealth Advisors, to help you navigate all of the most important financial decisions you’re thinking about from cashflow and debt tax planning and investment planning, and so much more.

[00:01:28] Feel free to schedule a no commitment introductory call.

[00:01:31] And we can talk about what’s on your mind financially. And how we help optometrist navigate that nationwide.

[00:01:36] And without further ado here is my conversation with Dr. Chad

[00:01:45] Start of Interview

[00:01:45] And welcome back to the Optometry Money Podcast. I am your host, Evon Mendrin, and I am excited to welcome back onto the podcast, Dr. Chad Fleming. Dr. Fleming, thank you so much for coming back on.

[00:01:56] Evon, thank you for inviting me and, I look forward to hanging out and chatting with you today.

[00:02:02] What are private label products in an optometry practice?

[00:02:02] Yeah, I’m excited to talk about something that you and I had brought up in our conversations, which is implementing private label products within the optometry practice. And as I thought about it, sort of preparing for this conversation, The more I realize that private label products are everywhere. You know, if we go to Costco, they’ve got Kirkland’s brand.

[00:02:25] If we go to Amazon, they’ve got Amazon Basics. If we go to Trader Joe’s, we see it in clothing. I mean, we see these private label brands sort of all over the place in retail and, often at less expensive prices. and and still often not very high quality related, you know, relative to other brands. So we, we see this sort of private label use of.

[00:02:49] of products all over the place in our lives. And, it, it would be interesting for me to hear how that’s best implemented within optometry. And as you think about private label, like what, what does that even mean in an optometry practice?

[00:03:07] Well, Evon, I think when you think of private label, different people think of it in different ways. Some people will think it’s less quality. Some people will think that it’s subpar performance. I think that private label, just like you mentioned, Kirkland’s, for example, with Costco, I mean, their stuff is, their stuff is good.

[00:03:29] I think it’s, you know, it’s repackaged with a private label, name on it. And sometimes it’s the manufacturing of that by the companies that makes it less expensive. I know in the contact lens space, for example, a lot of, my colleagues may not understand this, but if they go online, you can look up, the different, distributors, say a Costco, say a Sam’s, and you can see that some of our name brand, big contact lens, mainstream lenses are the exact lenses rebranded under a Costco name or under a Kirkland’s name or something like that.

[00:04:08] And so what happens is, is that, I think a lot of times manufacturers get a play on both sides of the coin and name brand. There’s a reason that people have name brands. So for instance, you think of the name brand, Lululemon, and what do people notice with Lululemon is they have a, a little spot or a little insignia that says, Oh, those are lululemons.

[00:04:35] So not only are they good quality, but there’s a status symbol associated with it. Well, when you deal with frames and ophthalmic lenses, the status symbol, there’s, the common person cannot tell, and a lot of times even the trained professional can look at a set of lenses with the naked eye and they can’t tell who makes these lenses. You have to get under high magnification, certain lighting, to see the laser etchings in the lens, to then understand, Oh, this lens is made by so and so.

[00:05:10] And so, what you really look for in private label is performance, and then, unfortunately, for every action, there’s a reaction. And so, Managed Care has been the action, they have been calling the shots, calling the shots as far as our reimbursements, as far as what lenses we might be able to use, may not be able to use, and so the reaction is, is that we still have to run a business and a company that’s profitable, so we have to look into what options do we have, performance wise, for the patient, because you want to give the patient a great product, but I need to be able to pay less for it.

[00:05:49] And the, you know, it’s a private label just across the board is a less expensive option, even if it’s the same lens with a different, branding or no branding on it.

[00:06:03] And why is that the case that for a practice to purchase these? private label products to then provide to the, to the patients. Why is it at a less expensive cost? I would imagine part of that is because there’s no marketing costs for the manufacturer to promote the brand. so it, it, it, avoids the cost of having to market and package those products, from your perspective why, why is it the case that those are less expensive for, for the practice owner?

[00:06:31] Well, for the practice owner, they’re less expensive because you don’t have front end, whether it’s sales reps or whether it’s marketing or whether it’s there’s cost of there’s overhead costs of name brand. Okay. Stuff. And when you take those overhead costs away, you’re removing a 10, 20%, level of cost that then can be passed on to the, to someone like myself, an owner, and I can get like performing lenses, coatings, and, and additional things to the lenses for at a fraction of the cost.

[00:07:10] Gotcha. Okay. Which then you can, you can improve the margins on the products while still maintaining all that same quality that you’re expecting in the products you’re providing the patients.

[00:07:20] Yeah, so for instance, if I’m paying a, I’m paying 60, my cost for an anti glare coating, a top end anti glare coating, and I pay another one 25 or 30 and performance wise, they both have a one year warranty on them. They both perform at the same level under usual and customary wearing and tearing. yeah, and patients see out of them the same. It’s hard for me as a consumer who does buy private label stuff. You know, it’s hard for me to justify at times, unless there’s performance issues, and you can show me performance issues, why do I need to go with the name brand? Especially if I don’t have a big, huge, round Mercedes insignia on the front of my car. And you can’t, and, and you couldn’t identify it. We’re caught up in the American way that there’s a status symbol. And so when you’re dealing with a product that does not have a status symbol on it, think of all of your shoes that you wore were all plain and you couldn’t tell one Nike from, Adidas from Puma, whatever.

[00:08:39] They were all exactly the same because there was no identification of the brand. What would you buy?

[00:08:46] Whatever was the less expensive for the same highest quality that you can get.

[00:08:50] Yeah, well, if

[00:08:51] you tried all

[00:08:51] for the biggest bank for the buck. Yeah.

[00:08:54] if you tried all

[00:08:54] three of them on, they all had similar warranties and comfort level. Which one are you going to buy? You’re going to buy the one that’s like, Oh, well, I’ll buy this one at 20, instead of the one at a hundred dollars, because nobody is going to even know which ones they are. And if we all, if you look, if you’re self aware and truly understand what goes on in the marketing world, the, American economy would not be driven if we were not so status oriented, because there’s a lot of products that we’re marketed to, and so we pay for that extra dollars because it’s got something stamped on it. So if you can’t see that stamp or understand that, then that value, that separation in value is lost. Because then it’s like, well, nobody’s going to know, so why am I going to pay the higher price? If it’s equal, if there’s quality equivalence,

[00:09:50] All things being equal. Right, right, right. Or roughly equal, I guess. have you seen within your own experience that certain percentage of patients are sort of really brand sensitive, versus certain percentages are not like as is there a subset of patients that really do care about, you know, a larger brand, even if the quality is the same.

[00:10:14] the only brand that I have seen people come in in the last 10 years asking for from an ophthalmic lens space is Transitions.

[00:10:28] Yeah.

[00:10:28] Other than that, and that’s the photochromics that change when you go outside, they get darker, go inside, they get lighter. Other than that, frame brands, I will say people come in and they request an Oakley or they request a Ray Ban. this generation, the millennial generation, Gen Y, Not so much. Gen X and older, they’re more brand specific with some of that, but the younger generation, what we’re seeing is they’re more interested in the, social aspect of the brand than they are about the, You know, does it have to have Nike on it?

[00:11:06] Does it have to have a certain insignia on it? That’s less important. And we’ve, we’ve proven that in our practice. And I know hundreds of practices throughout the U. S. that have proven that that brand, the look and feel of that brand, is much more important than the brand is for what I would say a higher percentage of people.

[00:11:27] Now, a lot of colleagues like myself, I think, this is my opinion, are more caught up themselves in what they are doing. are selling or have in their retail than what is actually selling. Cause there’s too many successful practices that are taking a route of, we don’t have to have the most recognized brands. I mean, look at like a Warby Parker that came in and have done very good at creating their own brand. They’re not Oakley, they’re not Ray Ban, they’re not, you know, anything else. They created their own brand. People like it because of the way it looks and it’s Warby. So, I think a lot of it has to do with, I mean, I can’t take away from that.

[00:12:17] There’s obviously statistics that will say that branding is extremely important. I just think that you can be very successful a less branded space. And there’s more margins to battle the managed vision care plans.

[00:12:40] Traditional Way to Select Frame and Lens Inventory

[00:12:40] Gotcha. Gotcha. And to contrast, for practices that have historically not used private label and are using the larger brands, what has traditionally, at least from your perspective, gone into the buying decision of which frames and lenses to have in the practice and to, and to build the inventory?

[00:13:04] Traditionally, or the old model of doing it is, you have, Willie Lomac, the door to door salesman that comes in with, frame allotments, and they set them down, and you have one of your opticians that you pay to, You know, look at 15 different reps that come in that week, spend an hour with each rep, looking at the frames, picking what they think’s going to sell. So it’s very subjective in what’s picked. and they basically get a shop with the owner’s money, put the frames out on the board. what sells, sells. They take them off the board, send them in, and then they wait for the next rep to come in and they order their next pile of frames. And so you get this ebb and flow based on your optician getting to shop, whichever rep comes in next or whichever rep that they’ve been working with. you get to do that. That has been the old model of doing things, which is an expensive model. And so that’s been true. And some of those sales reps will have statistics of hey, what’s selling, what’s not selling in your practice regionally. and so they’ll pick and choose. What’s interesting is the larger corporations, and now private equity, they have it down to a science and they are much more well versed in retail and understand what sells, how to stock it and how to do it in a way that doesn’t require so much heavy lifting by your staff members.

[00:14:40] And so, We pay too much as private practice owners. We pay too much of our staff time to sit and do it the old model. That’s, that’s what I’ve seen. progressing from being a buyer at an optical place prior to optometry school to watching my wife who was, worked for a frame company for 10 years to then doing what we’re doing today in just making things more efficient.

[00:15:08] are there certain practices or are there practices with certain patient demographics that should, that are a better fit for a private label product frame or lens than others?

[00:15:20] You know, are there certain practices where they really should be evaluating this? more quickly than others.

[00:15:27] All practices should have a private label unless you are a boutique and people are coming in, then you could still consider it because even boutique places have a private label. But if you are a, you know, you’re a high end watch seller, most likely you’re going to have Rolex, Omega, you’re going to have those high end and that’s what you’re going to have.

[00:15:52] Anybody else in the ophthalmic space, private label should compliment what they’re doing. Where the mistake is made is people have failed at private label because they’ve gone to China, or they’ve gone and gate, they’ve gone and got cheap label. I’m not talking cheap label. I’m talking private label, meaning the performance is still on par with other products that you have.

[00:16:18] And there’s no, I wouldn’t recommend to anybody that they just have private label. And none of your, none of the examples that we have out there that are successful just have private label. It’s a mixture, it’s an offering, it’s a way to balance out profits, be able to be competitive with the Warby Parkers, the Costco, the Sams, So, so it’s a part of the strategy of being successful in the optical, because I hear too many times, colleagues who have practices with opticals are saying, you know, you just can’t make money anymore in the optical. We just do it as a service. And I respectfully and wholeheartedly disagree.

[00:17:00] Interesting. That’s, it, the optical seems to be a huge driving or a huge revenue driver in most practices I come across. So that’s a fascinating,

[00:17:10] way to look at that.

[00:17:11] it’s a

[00:17:12] revenue driver, Evon, it’s a revenue driver, but is it a high, highly profitable, high margin place?

[00:17:20] Yes. Good. Good distinction. Yes. That’s, that’s a good point. it’s driving revenue, but is it driving. Profitability is the right question.

[00:17:30] Profitability, correct?

[00:17:32] Yeah. And with cost, I mean, cost of goods sold, inventory being one of the major line items in any practices, profit and loss that has an optical, So it’s a major part of a profit and loss from an expense or an investment standpoint. So anything you can do to improve the margins on the inventory you’re purchasing, the better off it will be.

[00:17:54] How does a practice create a private label?

[00:17:54] So that goes to the next question though, and how does a practice select or create a private label?

[00:18:03] And I’m going to quickly show my ignorance here of not knowing how this world operates. Like how, How does a practice go about doing that?

[00:18:11] Well, there’s a couple different ways. What’s interesting is this private label has been around for quite some time. It used to be that you had to be a part of the buying group and everybody that has been part of different buying groups knows what has happened in the past in regards to the buying group will have their own private label that they’ve arranged with a particular manufacturer who will come out and create something specifically for that buying group that is, you know, at a reduced fee because it doesn’t have that name on it.

[00:18:45] So the, it’s been available within buying groups. If you ask the right questions, and that’s a lot of times what I run into is that my colleagues don’t ask the right questions and they listen to the sales rep says, Oh, you don’t want that. Yeah, we do have that. But, that’s probably not going to be the best option for you. Well, I would say there’s a conflict of interest there because why then are the large groups needing to have the private label because they know that the conflict of interest is, is yes, we understand that the name brand stuff has, has margins built in and performance that can pay for the marketing and for the sales reps and for everybody on the front end. So you don’t get, you really have to dig for the private label. So most of the times you can find it in a buying group. You can also find it amongst your lens manufacturers and There’s various labs that have done a good job of making a private label available. The biggest thing is getting your hands on it, testing it out, seeing performance, seeing quality, and making sure that you are getting something that you want to represent in your practice and not just a low budget option that just doesn’t have a brand name performance next to it.

[00:20:15] Does that make

[00:20:15] sense? Did that make

[00:20:17] that makes, makes sense. And I was looking through an article from 2002, in Review of Optometry titled, Can Private Label Save Private Practice?

[00:20:26] So certainly this has been a, a topic that’s been discussed. It’s been around for at least 20 years.

[00:20:33] Red flags to avoid for private label products

[00:20:33] And, and are there any red flags, things to avoid if, if a practice is going to a manufacturer or, or even within the buying groups of, figuring out whether or which of these private label products to use?

[00:20:50] I think you avoid taking it at face value of what is equivalent product because the manufacturers will tell you, well, there’s not a private label that can match up to our particular lenses. And with the private label, others will say it’s the same performance. There’s no differences with it.you need to test the theory. I think what’s fair in testing is it comes down to performance. You test it out on various different prescriptions. You test it out on people who have more, maybe high cylinder, maybe, engineer, high myope, high hyperope, high plus.just various things like that. You test that out on patients and see how it does perform, and you’ll find that there’s, you know, performance is really the, the bottom line. And then on the, on the scratch coatings, figuring that out, you just, you have to, Look at them, look at the, how the, Cosmetically, what do they look like? Because there’s some, there’s some high end stuff that cosmetically the coatings look, don’t look that good. And there’s private label stuff that actually the coatings do look better, in regards to color, in regards to reflection, in regards to just overall performance. so yeah, you’ve got to test it out. I think that’s where it’s important to have an open mind to, and be always be curious when you’re in business and you’re running your business is don’t assume that what you’re currently doing is the best option. It might be the best option, but I see a lot of people also like, Hey, we’re good. You know, we, ours is the best. and I’ve found many times, even amongst myself and amongst,good friends of mine who have said they’ve got the best, got the best deal, got the best private label or got the best, no, we do the brand name and we just got really good pricing on it. And then later they test something out and feel like, oh, wow. Why didn’t I, why didn’t I know about this? And most people stopped being curious. So even though I’m sitting here on this podcast telling you, Hey, I, I think I’ve got this figured out. I’m always testing my hypothesis. I’m always testing to see, is this the best? And that goes back to, you know, yearly reviews, quarterly reviews is what we’re doing the best for the patient. Are they still getting top performing product? And the prices that we’re paying, is it still something that, is helping us to be profitable?

[00:23:28] Are there volume requirements for private label products?

[00:23:28] Yeah. And in, in terms of, you know, the, the importance of testing the product, but then there’s the commitment. And I would imagine there might be some hesitation to purchase for the first time in large quantities, or maybe is, is there a requirement if, if you are, were operating outside of a buying group purchase, you know, a certain amount of, of quantity of volume, how, how does that work?

[00:23:57] No, not at all. I could flip tomorrow from what I’m currently using to something else. It’s how you set your systems up within your organization. So, for the longest time, we set our level of lenses. that patients could pick out. Basic, Premium, Elite. We set them by branding. So when we were using a vendor, we would have our basic was branded this name, our premium was branded this name, our elite was branded this name. All of our staff then had to learn all these different brands and it was a major lift. And I said, this is ridiculous, because this gives way too much power to whichever manufacturer I’m currently using and makes it hard to switch. Today, we don’t. We don’t sell a name brand. We sell a level, just like you’ll see in, Managed Vision Care.

[00:24:50] They’re set up based on codes. So we set up Basic, Premium, Elite. The doctors will come out, they will recommend a level of progressive lens or single vision lens based on the patient’s prescription, based on the patient’s needs, based on the patient’s need for performance. And they’ll either fit the Basic category, the premium category or the elite category. Once that happens, there is not a The education between the optician and the patient is done about what separates the different levels. So at an elite level, you get individualized and customized. So those are two key features of a higher level, higher performing lens. So they get educated on this. That’s what they’re paying for.

[00:25:38] So it’s basically, you’re going to the car lot and you are deciding that I’m going to have a Mercedes, a BMW, or a Porsche. And they’re not going to pick it based on the brand names because patients don’t know the ophthalmic lenses by the brand name. So then what we’re going to do on the back end is we’ve centralized the ordering.

[00:26:02] The person that does all of our ordering will come in there and say, hey, it’s an elite lens. We need to just give them elite product that falls in categories that’s elite. And Managed Vision Care, VSP, IMED, whatever it is, you have different categories based on performance. So we will sell an elite category. No, we have no issues. There’s nothing because that’s, they are getting what we are selling them. But do you see

[00:26:27] the, do you see why that is critical to giving me the freedom and flexibility to pivot? When I need to, because what I’ve seen is manufacturers of these lenses will have price increases and it’s so hard for us to pivot when we’re heavily invested in a particular brand or even private label that we can’t pivot.

[00:26:52] And so when you can’t pivot, you can lose profitability overnight.

[00:26:57] Yeah. That’s an interesting framing, no pun intended, of the, of the way you, you structure that. Cause you’re, you’re structuring your offerings to patients based on, you know, good, better, best, or, or base, you know, better elite, however you’d want to describe that. but you’re not attaching it to like, You know, good, better, best brand.

[00:27:22] It’s good, better, best quality or features.

[00:27:26] And you are deciding which frames, lenses, whatever it may be, fits within those tiers. You’re the one deciding that you’re not sort of beholden to a particular brand to fill that category, or you’re not attaching the qualities to a particular brand.

[00:27:42] no, don’t, don’t necessarily need to. if somebody comes in requesting a brand. Which I don’t know in 20 years, 30 years, because I was in the optical before I was in optometry school. I don’t, maybe a handful of times somebody’s actually got, picked a brand of ophthalmic lens, like, I gotta have this brand.

[00:28:08] It’s just not a, that, that’s why to me, I, I, you got to sell a good product. I, and, and here’s the danger in this is that you could take advantage of patients this manner, so you have to have integrity in the sense that you are selling them what you say you’re selling them because

[00:28:31] you could swap them out something different, but that’s, I would consider that as being dishonest and wouldn’t do that.

[00:28:40] Financial and practice benefits of private label products

[00:28:40] right. Right. Yeah. And, so all that being said, I mean, ultimately this is a podcast about money to, to an extent. And, all of this business stuff relates pretty directly to, to the, the optometrist money in terms of the revenue and profit.

[00:28:56] The, the optometrist is earning the ability to pay associate doctors. If you have associate doctors. And the ability to do all the things that you want to do in life, because your business is prospering. So, thank you. How have you seen that private label products have positively impacted the practices you’re working with?

[00:29:18] And we’ve talked a lot about that already in terms of the cost to purchase and the quality and the margins, but, let, let’s just focus more in on it directly. How have you seen the, the, what, what benefits. Have you seen with using private label products?

[00:29:33] Happy Patients. So I’ve not seen a difference in patients and happy doctors because I know that what we pay percentage of production is in the top 90th percentile, based on percentages, because we still, have a category over 20%. of revenue. And if you look into that more of the averages of what doctors are paid, paid on a production basis is 15 to 18%. I would say that’s right in the average rain. I’ve heard as low as 9 percent on the West Coast. but when, when we’re able to pay, in fact, we looked at one time, we looked at private equity and I’m always intrigued with what’s going on. So I went down that rabbit hole to just see what was out there. And our EBITDA was not as good as it could be because, and they told us, you pay your doctors too much. We would have to come in and we would have to ratchet down what you pay the doctors in order for it to get, in the area that, you know, for it to be the multiple that would make sense. And I knew at the time, cause we were paying all of our, we were paying doctors, over 20%, all of them, of revenue. Since then we’ve, we’ve adjusted some, but my point being is our cost of goods runs right around 20%, at times less than that. That is about six to 7 percent lower than what is considered Good. And so

[00:31:08] when you run cost of goods at that range, you have a bottom line that, yeah, you could take it all home as the owner, but I would rather have good people and attract the best with the money that we’re able to pay. because number one, I hate turnover at doctors. The number one person I don’t want to turn over is doctors. Number two is managers and higher level people within my organization. Okay. So if I can keep them, and we all know that inflation is going through the roof, we all know paying people is more and more difficult, you gotta find ways to generate more bottom line income.

[00:31:47] And that’s how we’ve, that’s been part of our, strategy.

[00:31:52] I mean, even if you look at like a, just sort of randomly choosing a 1 million gross, gross revenue practice, even if you are letting 3 percent of that drop down to the profit, that’s 30, 000. to the practice owner, right? You’re, if you’re able to make large improvements in cost of goods and just keep portions of those improvements, percentages of those improvements, that can add up to quite a bit over time.

[00:32:20] so that’s pretty fascinating. I, I appreciate you going through all of this with me as I’m, I’m learning, in real time here and I’m always fascinated about this, this constant effort to. to make private practices more and more independent and to put more of decision making in the hands of the practice owner.

[00:32:42] this is a fascinating topic for me to, to hear about and to learn about, and hopefully for the listener to learn more about as well.

[00:32:49] Final Throughs

[00:32:49] any final thoughts, Dr. Fleming, as we, as we wrap up here.

[00:32:55] I think I’m going back to my main point that as I talk through all of this, the one thing I want a listener to take home is be curious and keep asking and keep looking for what options are out there because I think too many times a sales rep or a vendor or somebody comes in and gives you the company line and we trust that, but we need to trust, but verify.

[00:33:24] It’s an old Reagan thing way back when you trust, but verify. And I think that there’s not enough questions being asked. We get part, we get a part of, say a buying group, and we assume that that buying group is getting, getting us all the best options that are out there. And. I just, I say, just keep being curious.

[00:33:49] Meaning you ask the questions, you make connections, you find people you can trust who are running practices and don’t have their wagons hitched to somebody. I think that’s the biggest thing in my first question is where’s your wagon hitched? So are you a part of some, some organization, some buying group and you’re paying more in cost of goods to be a part of that group? than what you could be doing outside of that group. And to me, that’s like the country club down the street. I’m paying way more for golf than I should be paying for. So I can say I’m a member of that country club.

[00:34:28] Gotcha. Well, I, I appreciate that. speaking of practice owners that you can trust, Dr. Fleming, where can people find and follow and learn more about what you’re doing?

[00:34:39] Well, that’s a good assumption that they can trust me on this, this short thing, but I would be more than happy to, discuss, you can find me at, Chad. at pipgpo. com. just send me an email. I would love to, talk to you. I get involved in a good amount of, coaching and consulting to help my colleagues out. so yeah,

[00:35:04] Sounds great. I will put all of that contact information and any of the things and links and resources we talked about. In the show notes, and Chad, I really appreciate your time or as always, it’s been great to talk with you again, for the listener, appreciate your time and listening today, we will catch you all on the next episode in the meantime.

[00:35:24] Take care.

[00:35:24] ​