Pricing Strategies – the outlook for Medical Devices and

Text Preview:
Pricing Strategies  the outlook for Medical Device and Diagnostic Companies

established for generations and rather than their pricing             The company's economic strength  can the
systems evolving smoothly, new processes have been                    company afford to undercut the price of the
built on top of old ones to create a highly complex mesh              competition?
that hinders communication between the various                        The brand strength of the product and its
processes. These systems are often put to the test when               competition  can a brand protect the price of a
negotiating discounts and the addition of other products              product?
and services (bundling) to the deal in order to entice the
customer to make a purchase, and they frequently break            The medical device industry is finding answers to these
down. As one expert on pricing studies within the                 questions in various ways:
medical devices sector stated, in interview,
                                                                  Competitive technology

The pricing structures of some of the large medical               Direct Digital Radiography systems produce high
device companies are now so complex and the                       resolution images extremely rapidly and eliminate the
communication between sales personnel and                         need for chemicals and film storage that traditional X-ray
pricing managers so unorganised that there can be                 units require. Technologically they are the top of the tree
problems with tracking up to 6% of sales revenue.                 and are very expensive. By contrast, Computed
                                                                  Radiography units also produce digital images, but
                                                                  require a reader to scan the image and this increases
It is evident that the pricing strategies of many medical         the time to produce an image. However, the cost of a
device companies could be improved upon and this                  CR machine has been reduced making it relatively more
report investigates the strategies that are being used,           inexpensive compared to a DR unit and, as a
those that are recommended and the pressures that                 spokesman for Philips Medical Systems said,
influence pricing. These pressures include:
                                                                  "CR doesn't give you the productivity that DR systems
    The competition's technology                                  will, but if you are digitally inclined, it comes down to
    The competition's price                                       what you can afford."
    The reimbursement situation of the market being
    entered.                                                      Companies that have not invested in developing the
    The procurement methods within the market                     highest technologies can therefore price their products
    The price trends within the sector                            more cheaply and aim at different markets.
    The medical need for the product
    Who the customers are for the product                         Competition prices
    The brand strength of the product and its
    competition                                                   There is no medical device that stands isolated in the
    The economic and medical value of the product                 market place. It may achieve a better result than other
    The company's market share                                    technologies or produce its result in a more efficient
    The company's economic strength                               manner or operate in a novel manner, but there is
                                                                  always some other technology that attempts to produce
It can be seen how each of these factors raise questions          similar end results. Therefore, companies have to be
of pricing strategies and the report discusses them all,          very aware of the advantages that their technology
but some of note include:                                         offers over the competition and what their comparative
                                                                  prices are. As the General Manager of Business
    The competition's technology  is it as effective as          Development of Omron Healthcare, Inc in the US stated,
    yours? If not can you price higher than the
    competition?                                                  "The competition plays a critical role. If the competition
    The competition's price  should you match it?                sets the price low, we have to be competitive; therefore
    The reimbursement situation of the market being               we can't set our price too high. However, if our product
    entered  even if your technology is better than the          can be differentiated from theirs we do not have to price
    competition's will the reimbursement system of the            as low as the competitor. On the other hand, if they set
    country being entered price it at the same level?             their price high, we should not set the price too low.
    What are they looking for in order to reimburse the           Having said this we do not have to follow the
    price of a product?                                           competitors as this is a very dynamic area, and we need
    The price trends within the sector  are prices falling       to be flexible and responsive"
    or rising?
    The medical need for the product  can a greater              Reimbursement and purchasing
    need command a higher price?
    The company's market share  is the company's                 The price of a device is a crucial aspect in informing the
    market share worth protecting or enhancing through            opinion of insurance companies and government bodies
    aggressive pricing?                                           as to whether they should reimburse the customer for its
                                                                  purchase. Methods of reimbursement differ across
                                                                  countries and the purchasing patterns can even be

                              2                         HBS Consulting 2006
                        Pricing Strategies  the outlook for Medical Device and Diagnostic Companies

different within the same country. An example is given             efficient than its competitors a customer may be willing
by the Marketing Manager of Hill-Rom in Italy,                     to pay 10% more for it, but if an adhesive bandage is 2%
                                                                   more efficient a customer may not be willing to pay 1%
"In (northern) Italy most purchasing is done through               more for it.
public tender so the winner is not really the decision of          This can also manifest itself in other ways. As the Sales
the hospital as there is a formula that is being applied for       & Marketing Director of Abbott Diagnostics in Poland
the evaluation of quality, pricing, servicing etc. ... The         stated,
situation in the south of Italy is different. Hospitals buy
from the distributors and agents who they know very                "I agree that prices vary according to the perceived need
well. Also, in the south the top doctors have a high               of the product. For example, we sell more (tests) for
preference for quality products and they can dictate               oncology hospitals or intensive care units than to
purchasing terms. So the situation between the north               ordinary labs."
and south of Italy is a bit different."
                                                                   Roche Diagnostics in Poland confirmed this by stating,
Price trends
                                                                   "The proof for this lies in (looking at) programs funded by
Prices generally fall for two reasons. The first is that           the Ministry of Health: oncology programmes, cardiology
companies decrease their prices in order to gain a lead            programmes. The money from these programmes is
on the competition, and the second is that customers               directed to particular departments in the public health
demand lower prices with the threat of transferring their          sector."
business to other companies if their demands aren't met.
In both scenarios prices only fall in competitive markets          Market share
and the higher the competition the more they are likely
to fall. However, price points exist where slight                  Maintaining or increasing market share can be important
variations, either higher or lower, can result in either a         for investors in a company who may be interested to
minimal fall in the volume of sales or a rapid decline.            know that their company is dominating a market.
The positioning of these points will depend on the sector          Medtronic is a major player in the pacemaker market
involved and are determined through research and                   intent on maintaining its position and market share and,
experience.                                                        as a result, has offered competitive price cutting
                                                                   contracts to its customers which tie relationships
Trends can be broken by producing a product in a sector            between the customer and the company. Other
that is significantly differentiated from the competition in       companies, rather than reducing their prices for their
the sector. Smith & Nephew broke away from the falling             main products, provide additional services or add on
price trend in the general wound care market by leaving            packages to maintain their customer base.
it behind and concentrating its efforts on advanced
wound care products. Average wound care prices have                A company's economic strength
been reasonably level or decreased in 2004 in the USA.
This is expected to remain the case despite the fact that          If a company has large economic resources at its
hospitals are increasingly turning to advanced wound               disposal a number of pricing processes are open to it:
care products that carry higher prices. On the whole
purchasers of wound care products feel that the                        It can defend its market share by cutting prices on
potential for finding cost incentives to purchase wound                certain products.
care products are fairly high as there are a variety of                It can defend its market share by offering other
contract incentives that should allow them to find more                products or services in bundled deals.
savings. Among these incentives are tier pricing with                  It can maintain its prices, and its distribution and
volume based discounts, rebates connected with                         sales network can hinder attempts by other
standardisation, and long-term price guarantees.                       competitors to gain access to its customers
                                                                       It can set the price for the market through market
Hospitals are estimated to spend $2.5 billion a year on                dominance.
wound care supplies and most hospitals use several
suppliers, often choosing from among multiple sources              With regards to the last point a spokesman for Smith &
in group contracts. However, some hospitals have said              Nephew's orthopaedic business in Italy stated,
that they have found better deals by taking its group
contract to a different vendor and negotiating a larger            "The leading companies are the ones who create the
discount - up to 6%.                                               price and in Italy, for trauma products, the leading
                                                                   companies are Synthes and Stryker. So, of course if
Medical need                                                       they sell their products at a certain price level all other
                                                                   companies have to stay close to those, as they define
There is a much greater medical need for a defibrillator           the Italian price."
than there is for an adhesive bandage and this fact is
reflected in the medical device market. Medical need
affects price sensitivity. If a defibrillator is 2% more

                               3                         HBS Consulting 2006
                           Pricing Strategies  the outlook for Medical Device and Diagnostic Companies

Brand strength                                                               A simplified series of steps for arriving at a final price
                                                                             can be described as:
A brand is both the image of the company and the image
of its products and a strong brand can communicate                           Assess the costs
many factors: strength, efficiency, respect, but above all
familiarity. However, rather than breeding contempt                          This involves assessing the costs of developing the
familiarity can breed sales in the medical device industry                   product and marketing it. At its simplest level this opens
as long as the product lives up to its expectations.                         up the possibility of using cost-plus pricing in which a
There are those who believe that once a market is in a                       fixed percentage is added to the costs of the product in
price decline there is little that can be done to prevent a                  order to arrive at a final price. This is the minimal
product following the trend, but a strong brand can help                     strategy that any company should use as it doesn't take
prevent the slide  as the CEO of a major corporate                          account of the changing state of the market. A more
brand strategy division, stated:                                             frequently used strategy is price skimming, especially
                                                                             with innovative technologies where account is taken of
                                                                             the life-cycle of the device and the introduction of
"A brand is the world's most powerful business tool, in                      competitive technologies. In this, a high price is initially
part as effective branding serves as a prophylactic                          offered to recoup costs as quickly as possible, before
against price pressures. Within industries with increased                    dropping them when competition enters.
competition and price pressure, if the category of
products is seen as commoditized, and thus without                           Assess the medical need
difference, the market will be unwilling to pay a premium.
Effective branding confers a market premium."                                Devices with a high medical need can frequently
                                                                             command higher prices. In order to evaluate the medical
Company strategies                                                           need for their medical device, and the affect this may
                                                                             have on its price, a company can ask itself a number of
From the processes already mentioned it can be seen                          questions as shown in Table 1.1
that there are many factors that have the potential to
affect the price of a medical device. Medical device                         The answers to these questions are not always clear cut
companies therefore need to be highly disciplined in                         and ultimately many companies find themselves in a
assessing all of these factors before creating a final                       position where they gather this information and then use
price for their device.                                                      their instinct and previous experience to make a final

Table 1.1: Questions that need to be asked about the therapy and its effect

                              Questions                                                              Price result

 Will the symptoms or severity of the disorder affect price               Disorder severity can either make price sensitivity high or low

 What is the position of the disease in the payer, provider, or the       A high profile can either make the payer prepared to pay a
 public's perception?                                                     premium or feel that price should be lowered to make the
                                                                          therapy widely available

 What does this disorder cost the health care system and                  The more the disorder costs the health system (or society) the
 society? (direct, indirect, quality of life)                             higher can be the price sought for the device

 What is the potential to reduce the healthcare cost with the             The greater the potential to reduce the cost the greater the
 product?                                                                 potential to increase the price, as long as the price doesn't
                                                                          exceed the ceiling of the decreased cost

 What information will be needed to document and demonstrate              This can be information from clinical trials against competitive
 any savings?                                                             technologies combined with economic data using prices of the
                                                                          technologies and cost savings on patient care

 Is the product likely to be used as mono- or combination                 The whole of the cost of the therapeutic process needs to be
 therapy?                                                                 considered and the prices combined if it is a combination therapy

 Will the value of the product be different for different potential       For example: Will a stent placed in a carotid artery have the
 indications?                                                             same perceived value as a coronary artery?

                                      4                              HBS Consulting 2006
Download Link:
Share Link: Forum Link:

More on Business

  • Picture: Gr 10 Maths Literacy - Paper 1

    Gr 10 Maths Literacy – Paper 1

    File Size: 249.96 KB, Pages: 10, Views: 1,340,788 views

    GRADE 10 EXEMPLAR EXAMINATION NOVEMBER 2006 MATHEMATICS LITERACY PAPER 1 Minimum time: 1 hours Maximum time: 2 hours 75 marks PLEASE READ THE FOLLOWING CAREFULLY 1. This paper consists of: 5 questions an answer sheet with grid paper for question 4 (d). 2. Answer all …
  • Picture: Improving cash flow using credit management - CIMA

    Improving cash flow using credit management – CIMA

    File Size: 374.27 KB, Pages: 28, Views: 1,270,067 views

    Improving cash flow using credit management The outline case sponsored by Improving cash flow using credit management sponsored by Albany Software focuses on developing award-winning software to transform financial processes and is the market leader in electronic payment solutions. Albany makes financial transfers and subsequent …


    File Size: 311.77 KB, Pages: 8, Views: 521,280 views

    Product Name: MOBIL RARUS SHC 1025 Revision Date: 16Feb2007 Page 1 of 8 _____________________________________________________________________________________________________________________ _ MATERIAL SAFETY DATA SHEET SECTION 1 PRODUCT AND COMPANY IDENTIFICATION PRODUCT Product Name: MOBIL RARUS SHC 1025 Product Description: Synthetic Base Stocks and Additives Product Code: 606343-00, 973764 Intended Use: …
  • Picture: Onan RV Generator Troubleshooting Guide - Flight Systems, Inc.

    Onan RV Generator Troubleshooting Guide – Flight Systems, Inc.

    File Size: 2,729.64 KB, Pages: 18, Views: 37,558 views

    RV GENERATOR TROUBLESHOOTING GUIDE A Service of FLIGHT SYSTEMS 207 Hempt Road Mechanicsburg, PA 17050 Ph: 717 590 7330 Fax: 717 590 7327 CONTENTS RV Generator Troubleshooting Overview 1 RV Generator FAQs 5 Onan RV Generator Charts: Applications Chart 8 Test Information for Troubleshooting …
  • Picture: Interpretive Guide for the Achievement Levels Report (2003

    Interpretive Guide for the Achievement Levels Report (2003

    File Size: 624.72 KB, Pages: 19, Views: 38,998 views

    Interpretive Guide for the Achievement Levels Report (2003 Revision) ITBS/ITED Testing Program The purpose of this Interpretive Guide is to provide information to individuals who will use the Achievement Levels Report for monitoring the achievement of student grade groups, both at the building level and …

Leave a Reply

Your email address will not be published. Required fields are marked *