Article Date: 3/1/2006

PATIENT PROFITABILITY
Which Patients are More Profitable?
This study set out to determine the lifetime profitability of contact lens patients and spectacle patients.
By Mark Ritson, PhD

Figure 1. Spectacle patients bring in a high profit per visit, but their visits are infrequent.

In 2001 while at the London Business School, I was approached by representatives from Johnson & Johnson Vision Care and Bausch & Lomb. They explained that they represented Euromcontact, a larger industry group comprised of the European arms of Allergan, B&L, CIBA Vision, Essilor and J&J, with the purpose of cooperating on general industry issues. They wanted a marketing professor to investigate a major question, perhaps their biggest business question: Are spectacles really more profitable for eyecare practitioners than are contact lenses?

According to the member companies of Euromcontact, many eyecare practitioners who sell contact lenses believe that they're more profitable than are spectacles. But, they said it was equally clear that many other practitioners are reluctant to offer or promote contact lenses because they feel that spectacles are far more profitable. I set out to learn which group of practitioners was right.

Designing the Study

One of the first decisions I made at the outset was to not do any of the work or take any fee for this project myself. Instead, I recruited 15 MBA students to answer Euromcontact's question while I assumed a supervisory role. The students completed the project as part of their second-year MBA studies. The London Business School ranks as the fifth best MBA program in the world, and with an international class of students who already have extensive work experience, the talent pool is outstanding.

To ensure that the research would be completely objective and legitimate, I stipulated to Euromcontact that the team had to operate completely independently during the project. I also made clear that if we were to discover that spectacles are actually more profitable than are contact lenses, then that's what we would report.

Table 1. Method Stages

The research method we designed lasted for almost six months, included two major data collection stages and spanned five different countries and more than 200 eyecare practitioners. To answer the research question, we needed to build a model for both spectacle sales and contact lens sales and then compare the two. To accomplish this we needed to collect three very different types of data. First, we needed to understand all of the revenues that the typical spectacle patient and contact lens patient brought into an eyecare practice. This figure would have to include the fees received for goods, services and any additional products.

The next step was to calculate the costs associated with serving both patient types in order to calculate what proportion of those revenues was actually generating a profit. That meant not only understanding the mark-up on goods sold, but also understanding the complex set of costs associated with various staff members spending time with each patient. 

Finally, we also had to consider lifetime value. Rather than simply take a snapshot of the customer by examining a single transaction, we needed to evaluate the more protracted purchase cycles to get a true sense of value. Lifetime value is usually a calculation of three things: How much is spent, how often and for how long. Our research needed to compare not only the revenues and costs of spectacle patients vs. contact lens patients, it also needed to examine how often these customers returned to their eyecare practitioners and under what circumstances.

FIgure 2. Contact lens patients are initially less profitable, but more frequent visits for goods and services result in higher lifetime profitability.

Researching the Industry

The first stage of our research was qualitative. Good market research usually begins with an inductive stage in which the research team goes out on site to learn about the issue first hand. In this case we divided the MBAs into five different country teams based on the various languages that each was fluent in. We assigned teams of three to Italy, Spain, France, Germany and Britain. Each team went to 20 different eyecare practices and spent a day at each practice talking to the staff, observing the various activities that occur and conducting a time and motion study.

The groups took great care in selecting a range of contrasting eyecare practices. In each country we tried to draw our observations from a spectrum of urban and rural locations, from chains, multiples and single outlets and from large as well as small outlets. This stage proved vital for many reasons. The time and motion studies gave us a good overview of the different stages inherent in treating a patient and helped formulate the kinds of questions we would ask in the survey stage of the research.

We repeatedly observed the contrasting perspectives of different practitioners regarding contact lens profitability. Some were avid believers and claimed that it had made their businesses more successful, while others were reluctant to focus on lenses because they felt that simply too much time and cost were tied up in them and the payoff was demonstrably less impressive than for spectacles. As one German practitioner put it: "In the time it takes me to fit one pair of contact lenses, I can sell two pairs of spectacles at four times the price."

Figure 3. Contact lens patients who also purchase spectacles are much more profitable for your practice than are spectacle-only patients.

The biggest insight that came from this stage of our research was totally unexpected. From our original meetings with Euromcontact and throughout the project thus far, we'd made the huge assumption that there were two kinds of patients — those who buy contact lenses and those who buy spectacles. This is entirely consistent with the perspective of Euromcontact's constituent manufacturers, who often think in a product-centered way. But as our teams spent more time in the field, they realized that this actually was entirely the wrong perspective. When seen from the point of the view of a patient, contact lenses and spectacles are not mutually exclusive. It's true that many spectacle-wearing patients have no interest in contact lenses. But many contact lens patients also buy spectacles. They might not buy them as often, but when they do buy a pair a proportion of these sales may also go to the practitioner who is providing them with contact lenses. This proved to be an important insight for the model.

Gathering Survey Data

By March 2001 we were ready for the second stage of the research and the one that would provide the data that would drive our model. We spent that month devising and testing a questionnaire (Table 2) that was then conducted across our five European countries using a professional marketing research firm. In each country, the research firm called approximately 250 eyecare practitioners and asked them to take part in a 15-minute interview about their business. The practitioners were told that the London Business School was running the study, which was sponsored by several companies who would remain anonymous until the end of the interview, at which time they would be revealed to the practitioners. Sixty percent of those called agreed to take part, resulting in a pan-European sample of 750 different eyecare practitioners.

Once the data was collected we arrived at the interesting part. Using the 43 data points, we were able to build a model of typical eyecare patients in Europe. The one question we didn't ask during the phone interviews related to the amount of mark-up each practitioner applied to his products. We knew this was a sensitive topic and, potentially, one that we couldn't legally ask. Instead we assumed a 300-percent mark-up for spectacles (a generous one) and only a 50-percent mark-up for contact lenses (a worst case). We applied this mark-up calculation to the list prices the practitioners gave us to arrive at a measure of unit profitability. This is in turn allowed us to build a complex economic picture of each eyecare practitioner and his revenues, costs and profits. We were then able to compare spectacles customers with contact lens customers (who also occasionally purchased spectacles, too).

TABLE 2

  Survey Questions

QUESTION NUMBERS

N/A


1-3


4-7



8



9-11 




12-19

 





20-27

 





28-40






41






42 & 43 


N/A

SECTION CONTENTS


Introductory text


Size of business


Contact lens business as proportion of total business


Attitude of respondent toward contact lenses



Frequency of patient transactions




Detailed revenue estimates for core products for a single patient type over a set period of observation





Detailed revenue estimates for repeat/associated purchases for a single patient type over a set period of observation






Detailed time and motion questions. Who is responsible for primary tasks in the practice and how long do standard operations last?





Proportion of practice space devoted to primary product lines





Absolute revenue levels: total practice and contact lens specific

Thank you and close

Survey Results

The results immediately made sense. If you were to compare only the first transaction with a spectacle wearer vs. with a lens wearer, it would seem that the latter is much less attractive. The lower unit prices paid, the lower margins, the extra time spent with each patient all combined into a generally negative perception of contact lens patients.

But we realized that much of the optical industry is ironically very myopic — seeing only the transactions that occur immediately rather than taking a more long-term perspective. With the lifetime data from the survey, we were able to look beyond the initial transaction and the picture gradually began to change. Over time the spectacles-only patients remained dormant, adding no new business for their practitioners until their next potential repurchase (Figure 1). Meanwhile, the continuing return of the contact lens patient who now needed less service attention but a constant supply of lenses began to have an impact (Figure 2). Add to that the occasional purchase of spectacles or sunglasses that the lens patient made while renewing his lens order (Figure 3) and the picture became even clearer. Across each of the five European markets we studied, contact lens patients were demonstrably more profitable than the spectacle-only patients.

On average we found that contact lens patients were 60 percent more profitable than spectacle patients across Europe. To put that in perspective, this meant in 2001 an additional 70 Euros ($85) for every patient. Of course this result depends on a number of factors, and tremendous variance existed across the markets we studied. The single most important factor, however, was the managerial approach of the eyecare practitioner. Simply offering contact lenses is probably not going to achieve the kind of profits we uncovered in our research. Instead practitioners need to fundamentally revisit how they approach their business and their patients.

Look at the Big Picture

It took six months, 15 MBA students, five countries, 43 questions, 220 participating eyecare professionals and a 300-page report — but finally we saw the European eyecare market clearly. Obviously, patient care issues must always remain paramount. But practitioners must begin to see the world from a patient's perspective. That means accepting that there's no binary divide between contact lenses and spectacles. If you consider them as products, they're entirely different — but if you look at them as solutions to a patient's needs, then it's clear that a practitioner can successfully promote both to patients.

Another key factor is lifetime value. If eyecare practitioners focus on the long-term relationships that they can form with their patients, then four things are likely to happen. First, practitioners will begin to see that the profit contribution of contact lenses is initially poorer, but eventually greater than that of spectacles alone. Second, they will begin to move their business model from one that focuses on a single transaction to one that builds long-term, recurring relationships with patients. Third, practitioners will also begin to realize the additional selling advantages of longer-term relationships with contact lens patients as, on their repeat visits, they purchase spectacles and sunglasses in addition to more contact lenses. The final advantage occurs as long-term, satisfied contact lens patients recommend their practitioner to other potential patients.

Dr. Ritson is now an associate professor of marketing at the Melbourne Business School in Australia. An acclaimed expert on marketing and branding, he is a prize winning academic, teacher and writer.

His fifteen students from the London Business School now work in 9 different countries in a variety of roles that range from strategy consultant, investment banker to corporate lawyer and fund raiser.

 

TABLE 3

Final Results

  GERMANY FRANCE ITALY SPAIN BRITAIN
LTV CL (EUR) 348 476 442 339 488
LTV Spectacles (EUR) 198 355 304 280 394
LTV CL — LTV
Spectacles (EUR)
150 121 137 119 94

Ratio LTV CL/
1.8 1.3 1.5 1.4 1.2
LTV Spectacles          
Base Case          



Contact Lens Spectrum, Issue: March 2006