Maria Shepherd, President and Founder, Medi-Vantage09.01.22
When I worked in industry, one of my best managers said there were three fundamental questions that needed to be answered in medical device product development and design.
Depending on who you ask, there are four or more types of price strategies (Chart 1). We usually stick to the basic four (but will consider up to seven). My two favorites are value-based pricing and premium pricing and we always recommend a budgetary impact model to show the customer how the device price matches the value it brings, and to also actively demonstrate the differentiation of the device.
Studies have shown small variations in pricing (price elasticity) can raise or lower revenue by 20% to 50%. Warren Buffett said, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”1
As noted in the whitepaper, 3 Questions To Ask When Building a Pricing Team, the number of pricing professionals in organizations can vary from one to hundreds.2 Some companies make pricing a priority and others don’t. Key metrics include having one pricing professional per $50 million in revenue vs. one per $10 billion—a multiple of 200. Clearly, there is no consensus on this important metric that identifies the market’s willingness to pay, and the impact of specific pricing decisions on the performance of a company.
are many different types of methodologies, the most common are described in this section.
Conjoint
A conjoint analysis gives statistically significant results, which means it is the lowest risk, but is also the most expensive form of price strategy research (sometimes as much as several hundred thousand dollars). Using adaptive conjoint analysis is a smart move (the analysis is programmed to adapt to trends it sees in the respondent’s input, minimizing the time the respondent must spend on choices they will not select). In general, 100 respondents per medical specialty will need to complete a minimum of 15 product choice tasks. Each product choice task requires physicians (or nurse, patient, or hospital administrator) to select a product from three to five hypothetical product prices (described in terms of five to seven product features).
Gabor Granger
This method measures the buyer’s willingness to buy a device or service for a string of previously defined price points. The price elasticity is estimated using the aggregated data of all participants. Then, based on a sales scenario, the optimal price can be determined.
Typically, this method is used for questions asking about the possibility to increase pricing without a significant decrease in sales or to identify the price points where an end user’s motivation to pay increases or decreases excessively.
Van Westendorp
The Van Westendorp methodology can be powered to be statistically significant, but is often still less expensive because it does not require high levels of programming and respondent time. Four basic questions are asked:
After your sales team has initiated the purchase process, they will need to persuade the VAC (and maybe the clinicians also) with economic data. The detailed budgetary impact model in this article is built on a spreadsheet that allows the clinician or hospital administrator to input their own patient data, product cost, and product usage into the model to be able to see what the impact is based on their own use scenarios.
This allows a cost and ROI analysis to be performed by the VAC to understand the economic value in addition to considering the clinical value.
References
Maria Shepherd has more than 20 years of leadership experience in medical device/life-science marketing. After her industry career, she founded Medi-Vantage. Medi-Vantage provides marketing, business strategy, and innovation research for the medical device industry. The firm quantitatively and qualitatively sizes and segments opportunities, evaluates new technologies, provides marketing services, and assesses prospective acquisitions. Shepherd can be reached at mshepherd@medi-vantage.com. Visit her website at www.medi-vantage.com.
- Does the new medical device address an unmet need?
- Is the unmet need sustainable?
- Who is going to pay for it?
Why This Is Important
Don’t leave money on the table. The effort put into maximizing or optimizing product pricing will be a robust growth lever. If you estimate the price demand curve correctly, you will gain more customers, and considerably more sales than a business that does not treat pricing with the importance it deserves.Depending on who you ask, there are four or more types of price strategies (Chart 1). We usually stick to the basic four (but will consider up to seven). My two favorites are value-based pricing and premium pricing and we always recommend a budgetary impact model to show the customer how the device price matches the value it brings, and to also actively demonstrate the differentiation of the device.
Studies have shown small variations in pricing (price elasticity) can raise or lower revenue by 20% to 50%. Warren Buffett said, “The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10%, then you’ve got a terrible business.”1
As noted in the whitepaper, 3 Questions To Ask When Building a Pricing Team, the number of pricing professionals in organizations can vary from one to hundreds.2 Some companies make pricing a priority and others don’t. Key metrics include having one pricing professional per $50 million in revenue vs. one per $10 billion—a multiple of 200. Clearly, there is no consensus on this important metric that identifies the market’s willingness to pay, and the impact of specific pricing decisions on the performance of a company.
The Big Picture Spend (%) Hasn’t Changed Substantially
According to AdvaMed’s Estimates of Medical Device Spending 2021 Report, from 1989 to 2019, the big picture of medical device spending as a percent of total national health expenditures changed slightly year-over-year starting at 5.7% and decreasing to 5.2% (Table 1), with a range from 6.3% to 5.1%.3 During much of that thirty-year period, a significant flag bearer of changes to medical practice has been new medical devices—from transcatheter heart valves to artificial intelligence, robotics, new diagnostic tests, and new surgical tools. This data flies in the face of the common belief that medical technology is increasing costs, when the data shows how little the cost of medtech has increased as a share of overall national health expenses. Also noted in the AdvaMed report is the prices of medical devices have grown more gradually than the Consumer Price Index overall.Price Strategy Research
The methodology selected is all about the risk/reward benefit. While thereare many different types of methodologies, the most common are described in this section.
Conjoint
A conjoint analysis gives statistically significant results, which means it is the lowest risk, but is also the most expensive form of price strategy research (sometimes as much as several hundred thousand dollars). Using adaptive conjoint analysis is a smart move (the analysis is programmed to adapt to trends it sees in the respondent’s input, minimizing the time the respondent must spend on choices they will not select). In general, 100 respondents per medical specialty will need to complete a minimum of 15 product choice tasks. Each product choice task requires physicians (or nurse, patient, or hospital administrator) to select a product from three to five hypothetical product prices (described in terms of five to seven product features).
Gabor Granger
This method measures the buyer’s willingness to buy a device or service for a string of previously defined price points. The price elasticity is estimated using the aggregated data of all participants. Then, based on a sales scenario, the optimal price can be determined.
Typically, this method is used for questions asking about the possibility to increase pricing without a significant decrease in sales or to identify the price points where an end user’s motivation to pay increases or decreases excessively.
Van Westendorp
The Van Westendorp methodology can be powered to be statistically significant, but is often still less expensive because it does not require high levels of programming and respondent time. Four basic questions are asked:
- “At what price would you consider this medical device to be priced so low that you would feel the quality couldn’t be very good?”—to understand what is “too cheap.”
- “At what price would you consider this medical device to be a bargain—a great buy for the money?”—to determine what is “cheap.”
- “At what price would you consider the medical device starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it?”—to determine what is “expensive.”
- “At what price would you consider the medical device to be so expensive that you would not consider buying it?”—to determine the “too expensive” price.
Budgetary Impact Models—The Output of Price Strategy Research
No matter what type of price strategy research methodology you choose, persuading the value analysis committee (VAC) is no easy process without a good budgetary impact model (Figure 1).After your sales team has initiated the purchase process, they will need to persuade the VAC (and maybe the clinicians also) with economic data. The detailed budgetary impact model in this article is built on a spreadsheet that allows the clinician or hospital administrator to input their own patient data, product cost, and product usage into the model to be able to see what the impact is based on their own use scenarios.
This allows a cost and ROI analysis to be performed by the VAC to understand the economic value in addition to considering the clinical value.
The Medi-Vantage Perspective
Do not ignore the power of pricing to impact the strength of your company. Design your products with the end game of price strategy and your budgetary impact model in mind. Hospital administrator data shows that even during COVID-19 times, medical device companies have been able to get a 1% to 2% price increase which, compared to other industries, is substantial in the face of the economic headwinds we are all facing during these turbulent times.References
Maria Shepherd has more than 20 years of leadership experience in medical device/life-science marketing. After her industry career, she founded Medi-Vantage. Medi-Vantage provides marketing, business strategy, and innovation research for the medical device industry. The firm quantitatively and qualitatively sizes and segments opportunities, evaluates new technologies, provides marketing services, and assesses prospective acquisitions. Shepherd can be reached at mshepherd@medi-vantage.com. Visit her website at www.medi-vantage.com.
