Price increases are a tricky business. Their implementation must be carried out very carefully in order not to lose any customers, which would eventually level out the effects of the price adaption. Therefore, medtech companies need a carefully developed strategy, well-chosen tactics to mitigate the associated risks and above all, time.
That said, it is not necessary to have to wait more than a year to see the benefits of a price increase.
There are three portfolio pricing tricks available for many medtech companies that will have an impact by the end of the year, if implemented in the first half. These tricks pertain to subtle adjustments in the pricing portfolio. Besides their almost immediate profit impact, their key advantage lies in the very low risk for the company’s business during the implementation process.
Trick 1: Streamline Discounts and Rebates for Quick Wins
The first trick entails having a consistent and streamlined Discount and Rebate (DnR) structure. Many medtech companies have, for instance, customers that are granted discounts and rebates that are too high in relation to the revenue they generate for the company as well as the discount and rebates other customers receive. These customers reflect significant outliers in the DnR structure, directly affecting the bottom line. Identifying such outliers and correcting their DnR level is an easy method for quick profit wins. As an example, Exhibit 1 illustrates how a manufacturer of surgical products reviewed the level of discounts offered to each hospital they served in a systematic DnR analysis.
Discount And Rebate Analysis: Identification of DnR Outliers
Source: Homburg & Partners
Not only did this DnR analysis enable the company to determine the average estimated level of discount at each revenue point, it also helped decision makers to actively set a clearly defined corridor of acceptable discounts (+/-10%) around the average estimated discount level, allowing for some leeway to sales representatives. Based on these results, the DnR analysis clearly revealed cases, in which the granted discounts were too high in relation to the revenue generated with each hospital. Once these DnR outliers were identified in our example, a strategic assessment was conducted to determine whether any of the hospitals was a strategic priority for the manufacturer that might justify a “too high” DnR level. Upon completion of these strategic considerations, the DnR level was adjusted in the next sales cycle, immediately increasing the profit that was being generated.
However, some customers seem to have received DnR that are too low which might have led to insufficient revenues since incentives had not been optimal in the past. Moreover, these “too low” DnR represent a serious risk to the overall revenues across time as these hospitals might be taken over by larger ones or chains, who in turn claim the DnR for themselves.
Streamlining discount and rebates is an effective tool for quick wins and cannot only be conducted across customers, but also throughout other levels of analysis such as products or product categories.
Trick 2: Small Changes in the Pricing Governance for Fast Bottom Line Impact
Adjustments in the company’s pricing governance present another pricing trick. Most medtech companies have already implemented a governing pricing structure. Such a structure regulates the scope within which discounts and rebates can be granted by sales representatives on a certain hierarchy level and when buy-in from the next management level is needed. Adjusting this structure a bit downwards is an effective tool to achieve profit improvements quickly. Turning to a second example, a very common phenomenon emerged within an in-depth review of the pricing governance of a medical commodities producer: an accumulation of discounts and rebates granted right at the end of the scale before sign-off from the subordinate manager is needed (see Exhibit 2).
Common Pricing Governance Structure
Source: Homburg & Partners
In this example, sales representatives often offered discounts and rebates at the highest level possible before having to obtain sign-off from the upper management. As a result, higher discounts and rebates were being granted, reducing the overall profitability. In order to tackle this challenge, the governing structure can be simply re-designed by reducing the scale for needing sign-off by 5%. Although this approach does not solve the phenomenon of accumulating discounts and rebates, such a reduction has an immediate impact on the bottom line: The effort to go through the permission process to obtain the original discount and rebate granted is not worth it to sales representatives, thus incentivizing them to offer lower discounts and rebates. Small changes in the pricing governance are therefore a powerful tool to increase profits in the short term.
Trick 3: Profit Improvement Through Price Increases Of C-Class Products
The third and final pricing trick relates to the implementation of price increases regarding C-Class products. C-Class products constitute the majority of most companies’ product portfolio and are products that contribute very little only to the sales of a company. However, these products tend to be urgently needed, only by few customers so that they have lower price sensitivities. In many cases these are older lines of products not requested often anymore, or products that are rarely requested to begin with. Customers requesting such products are highly committed to these for a specific reason (for example, they used to work with older lines or target rare patient samples). A diagnostic device manufacturer that sought to improve the bottom line quickly decided to review the revenues of its product portfolio. An ABC-analysis was conducted to identify C-Class products in the reagent portfolio for their analyzers lines: As part of the analysis, products were quantified and sorted in a decreasing order according to the sales they generate (see Exhibit 3).
Source: Homburg & Partners
In our example, the products that contributed ~80% of the company’s revenue were the A-Class products and consisted of the major reagents for the leading analyzers in the manufacturer’s portfolio. These products are the sales drivers and usually only a few of them are available in the portfolio. The products that made up the next 15% of revenue are the B-Class products which were another set of reagents that did not contribute to the sales as much as the A-Class ones. The products that contributed to the remaining 5% of revenue are the C-Class products and mostly consisted of mainly esoteric (seldom-used) reagents.
As described before, C-Class products – although contributing low value – make up the biggest volume in the portfolio and many tend to have lower price sensitivities as they are needed by the customer. In this case, the reagents were required to detect rare diseases with low patient (and thus usage) cases but hardly any relevant competition in the market. Therefore, a price increase of most C-Class reagents was widely accepted by the laboratories due to their dependence on them in order to continue running their existing analyzer. Increasing the price of these C-Class products is therefore not only very effective but also carries a minimal risk due to the low price sensitivity of the customers.
With these three pricing portfolio tricks – identification of DnR outliers, adjustment of the pricing governance and a price increase of C-Class products – medical technology managers have access to simple tools for improving their bottom line in short term, while keeping risk for the business at a minimum.