By: Christin Trujillo

When you’re reviewing your Profit and Loss statement (P&L), Cost of Goods Sold (COGS) or Supply Costs, and profitability of your practice you may be asking yourself, why are my supplies so high and why is my profit decreasing in my medspa? When working with medical spa practice owners, there could be a variety of reasons these costs are increasing. When performing a profitability assessment for the practices we work with, there’s usually one or more of the following impacting costs.

Service Mix

When analyzing costs, we like to first consider where the revenue is coming from and what the cost margins are for that product or service. If you have a business model where more of your sales tend to be injectables, specifically wrinkle relaxers, over more profitable services like fillers and lasers, we generally see supply costs higher in the practice as a whole versus other practices that have a more equal service mix across injectables, lasers, and aesthetician services. In evaluating a multi-location medspa practice, we recently observed that one location had significantly higher costs than the others. The reason? That specific location was generating a higher percentage of revenue from wrinkle relaxer services versus the other locations that were performing better in services that had better profit margins.

Additionally, high retail sales in your business model may also have this effect. While we like to ensure our practice owners and clients are aiming for retail sales to be approximately 10% of their revenue, we work with many practices across the country that have a higher percentage of retail volume (think 20%-40%). Although these products are generally marked up 100%, that likely yields the lowest profit margin than any other service or treatment that you sell. With a 100% markup, the supply costs are 50%. Even compared to injectables at 30-40%, retail sales (while a great source of incremental revenue) do come with a larger supply cost.  This is before even considering discounts. Practices that are discounting retail have an even larger cost than 50% on those products.

Inflation

All practices have experienced some form of price increase in their supplies, which results in an immediate impact on profitability.

If you are paying more today for the same supplies you purchased a year ago without passing on a price increase to the patient, you’re taking an instant hit to profit. It’s important that you review your pricing, shop smart and compare prices within the market with other vendors, and implement regular pricing increases to your products and services. This is a good rule of thumb even when we aren’t in an inflationary period.

Your Prices are Too Low

Regularly increasing your fees is one thing, but it’s equally important to make sure your prices are set appropriately in the first place, and that you consider your discounts or pricing promotions when thinking about what you are charging patients for your services.  Oftentimes, we’ll see supplies costs too high as a percentage of revenue  because services are sold at competitive prices that don’t align with the revenue and profitability goals of the practice. When you’re paying top or even mid tier for your supplies, having a lower price point for patients may be the reason you’re experiencing less profitability.

It’s becoming more difficult to compete in a market where your competitors have lower pricing for wrinkle relaxers or fillers than you are able to charge.  These lower prices could still be profitable for your competitors – you don’t know what buying tiers or contracts that they have with vendors. If you try to compete with them, you only impact your bottom line. You  might not be able to win on pricing alone.  

As a best practice, it’s important to review your costs and what your prices are to ensure you maintain profitability. And remember, any time you discount the prices on services or products, you’re still paying the same amount for your supplies (even if your rep gives you free extras).

Accounting methodology

If your financials are prepared in cash accounting vs. accrual, you’re expensing the supplies as you buy them, not as you use them.  In the short term, expensing your supplies when you buy them (versus when they are used) could inflate your costs as a percentage of revenue. There are a variety of reasons for these short term cost increases: 1) you want to take advantage of better pricing from vendors so you stock up, 2) you have an event coming up that you need to stock up for, 3) you’re over ordering without realizing due to a lack of inventory or ordering processes.  When you’re accounting is on a cash basis, it’s a lot harder to see what is actually being used in the practice.

Lack of inventory management

Practices should set parameters on ordering products and supplies from vendors based on inventory need queues. It sounds really enticing when reps come in and offer a pricing or rebate that you almost can’t refuse. While participating in these types of promotions seems like you’ll save more money over time because you’re getting an instant discount or rebate for a larger bulk purchase, many times it may not make sense for the practice the participate in these types of promotions because the inventory is not turning over quick enough – often times leaving items sitting in the refrigerator or shelves for months on end and sometimes expiring before it’s used.

Loss and Shrink

Speaking of expired products, there are other opportunities that we often see that result in costs increasing. 1) You may have products and supplies expiring before they’re used, 2) your team could be wasting supplies and using more supplies or products than necessary, and 3) something infrequent but certainly something we see from time to time, staff is giving away or even stealing products and supplies.

Cost of supplies and consumables is one of the largest expenses a medspa can have, and can drastically impact a practice’s profitability.  Without proper oversight, accounting, and management, practices are wasting money.  If you’re curious about how your supply costs stack up, obtain a complimentary cost assessment for your practice by visiting our website at mavenfp.com.