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,
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"
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
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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,
"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
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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?
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