How to Use Gross Profit Margin to Maximize Profitability

The optical dispensary in Dr. Kling's practice. He says that gross profit margin is a key number to evaluate in your profit and loss statement.

The optical dispensary in Dr. Kling’s practice. He says that gross profit margin is a key number to evaluate in your profit and loss statement.

Details on evaluating a key metric to grow profitability.

By Mick Kling, OD

May 15, 2024

If you ever saw the reality TV series, Shark Tank, you likely witnessed “Mr. Wonderful” (Kevin O’Leary) ask an eager entrepreneur, “What are your gross margins?”

For an investor like O’Leary and the rest of the sharks, it’s an important question.

In accounting, gross profit margin (GPM) is a financial metric used to measure a company’s financial health, performance and profitability. More specifically, it reveals how well a company is competitively pricing its products relative to expenses, which is critical for business success.

What is Gross Profit Margin?

Gross profit margin for an optometry practice represents what’s left over after deducting the cost of goods sold (COGS) from revenue, and before considering the operating expenses of the practice.

As a refresher, COGS include the products that we purchase and resell to our patients and customers. The most common include frames, ophthalmic lenses (lab fees) and contact lenses; but for many practices, this may also include dry eye products, nutritional supplements and optical accessories.

Mathematically, gross profit margin can be expressed as a percentage, calculated by dividing gross profit (revenue minus COGS) by total revenue and multiplying by 100.

Example:       $1,000,000 (Revenue) – $280,000 (COGS) = $720,000 (Gross Profit)

$720,000 (Gross Profit) / $1,000,000 (Revenue) = 0.72 x 100 = 72% (GPM)

Why GPM is Important

The profitability of a business starts with gross profit margin and serves as a key indicator of a company’s financial performance and viability. A healthy gross profit margin indicates that a business is generating enough revenue to cover its expenses for frames, lab fees and contacts lenses while leaving room for employee wages, occupancy costs, marketing and other office expenses.

Most importantly, it enables a company to be profitable, ensuring long-term viability. When a business is experiencing low gross margins, there simply isn’t enough to cover the operating expenses of the business, further squeezing profitability.

Where GPM Lives on the P&L

On a typical profit-and-loss statement, gross profit margin can be found just after the COGS, and before the operating expenses of the practice near the top of the P&L.


Setting Up Your P&L Statement for Clarity

Getting the most out of GPM requires an organized P&L statement. As a practice transition advisor and consultant, I review multiple P&L statements each week and find that most are unorganized, making measuring GPM difficult.

For instance, most OD practices record “income” as a single line item, while correctly listing COGS into unique expense categories such as “frame expenses,” “lens expenses” (lab) and “contact lenses expenses.” From an expense standpoint, this is helpful in understanding where the money is going, yet provides little insight into how these expenses relate to the income of the practice.

Here is an example of the top of a typical P&L:

While the expenses are clearly identified in this example, we are unable to determine how these expenses relate to the income of the practice, losing valuable insight into GPM.

A better solution is to create income sources, that is, break “income” into:

  • Professional services income
  • Frame income
  • Lens income
  • Contact lens income

By doing this, we can now easily compare our frame income to our frame expenses, for example, and use our profit margin formula discussed above to calculate the profitability of frames as a standalone expense and profit center. By using this same strategy for lenses and contact lenses, we now have crucial insight into the gross margins for each of these COGS categories.

Here is a look at the clarity provided when income sources are broken out of the broader line item of “income” found on the P&L:

Once you create income sources, you can use the following two-step process to calculate GPM on frames, lenses and contact lenses separately. This strategy can also be used for all products sold in the office such as supplements, dry eye products and accessories.

Using Financial Software to Track Income Sources

While all practice management (PM) software applications track production, most don’t track collections by income sources (i.e., professional services, frames, lenses, contact lenses, etc), making it difficult to record unique income sources on our P&L statement.

One workaround is to run a production report, (which most PM software applications will produce), and apply the percentages of production for frames, lenses, contact lenses and professional services to the actual receipts (money in the bank). Then, make a general journal entry into your practice financial software to reflect these amounts. While not perfect, when tracked consistently over time, trends will begin to emerge.—Mick Kling, OD

GPM Formula: Frames

   Step 1:  Frame Income – Frame Expenses = Frame Profit

   Step 2:   Frame Profit / Frame Income * 100 = Frame GPM (%)


$200,000 (Frame Income) – $90,000 (Frame Expenses) = $110,000 (Frame Profit)

$110,000 (Frame Profit) / $200,000 (Frame Income) = 0.55 * 100 = 55% (GPM %)

By understanding the gross profit on frames, lenses and contacts lenses independently, we now have useful insight into whether our pricing strategies are appropriate and profit margins meet our expectations.

High Retail Pricing + Low Wholesale Cost = High Profit Margins

Achieving high profit margins requires a balance between pricing products as high as possible yet staying competitive within the market. There are various pricing strategies used in optometric practices which include:

  • Competitive Analysis: Researching what our competitors charge
  • MSRP/Rep Recommendations: Asking our reps, “What should I charge?”
  • Multiple of Cost: A common practice for frame markups (e.g., 3X wholesale cost)
  • Target Gross Profit Margin: Setting a target for profit margins

While all of these pricing strategies can be useful, setting targets for gross profit margins ensures that we are pricing products in such a way that allows our business to achieve maximum profitability. It serves as a compass for guiding pricing decisions by removing arbitrary measures for determining how much we should charge, effectively “baking in” the desired level of profitability.

Using GPM for Retail Pricing

Now that we understand the value of establishing target profit margin goals, we can use the following formula to calculate our retail pricing based on these goals.

Example:       Wholesale Cost: $100                Target Profit Margin: 65%

$100 / (1.0 – 0.65) = $285 (Retail Price)

If we know our wholesale cost and desired GPM percentage goals, it’s easy to determine what our retail price needs to be to achieve this goal using the formula above. Setting target profit margin percentages for all of our retail products ensures we are achieving the margins we need to enjoy profitability.

Putting It All Together

Gross profit margin (GPM) is a crucial  indicator of a company’s financial health and viability. By deducting cost of goods sold (COGS) from revenue, gross profit margin reveals the efficiency of pricing strategies and controlling expenses.

Organizing the P&L statement for clarity, breaking down income sources, provides further insight allowing us to calculate gross profit margin on each of the products we sell. Finally, with a known wholesale cost and profit margin goal, we can easily calculate what our retail prices should be to meet our profitability goals.

MMick Kling, ODick Kling, OD, is the president of Impact Leadership and the founder and CEO of Invision Optometry in San Diego, Calif. Dr. Kling is also the Practice Management and Transition Advisor for Vision Source. To contact him:

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