Medtech is facing cost pressures from multiple fronts. There are many levers that Medtech can pull to alleviate these pressures and thrive. One of the most important levers is a robust contracting strategy that ensures optimal implementation of your pricing strategy. A comprehensive contracting strategy helps ensure win-win financial deals for all stakeholders and delivers the right products, services and experiences to customers. So what elements constitute a good contracting strategy?
- Have a deep understanding of the contracting entities and their relationships. The healthcare ecosystem is a complex maze of interrelated entities. This ecosystem keeps changing given customer consolidations, new alliances and the emergence of new business models. Hence, it’s critical to gain a deeper understanding of the entity you want to contract with, whether it’s an IDN, GPO, distributor, ASC, reference lab, imaging center or even the government. What is their charter and what are their needs? How much are they financially focused, outcomes focused, or experience focused? What is their relationship and influence with other entities in the ecosystem? Gaining this understanding will be the first step in creating a sound contracting strategy.
- Create a robust set of flexible contract options. There are different combinations of contracting types and structures but knowing which key elements are most crucial to your strategy and your customer needs is important. For example, what is your own position on the contract? Are you at a stage where you can only bargain for access as part of a multi-source contract? Or can you communicate your value prop well enough to go for a sole-source contract? Then there are several elements within the contract that can help shape the customer’s behavior and impact the deal’s profitability. These are typically clauses with discounts, rebates and the associated compliance terms (more on that later). They also cover contract length, payment terms, financing methods, billing methods, price protection clauses, confidentiality clauses, etc. Each element is a potential lever to be pulled during contract negotiations. For example, in favor of a certain revenue commitment, you could relax the payment terms to net-90 instead of net-30. Or you could come up with a more flexible financing method to enable customers to lease or rent your products instead of purchase them. Having a flexible and robust set of contracting elements will improve the odds of a win-win deal.
- Take a solution-centric (not product-centric) approach to contracting. Having a sound offering strategy is a precursor to a contracting strategy, and it’s becoming increasingly important to differentiate yourself by selling services and software along with your core product to make your solutions more holistic and complete. For example, medtech industry segments such as diagnostics frequently offer software with their products. There are several service components that can be included in a contract to make it more differentiated. Service components could include customer training, break-fix services, inventory consignment, technical support and co-development. Several manufacturers now have a “business solutions” group that engages with customers for special consulting projects that focus on areas such as process improvement, supply chain streamlining and analytics. These solutions are usually part of the contract. Such solutions not only work, but they also create stronger partnerships in the process.
- Create a comprehensive discounting strategy. Discounts and rebates are important elements of the contract and they need to be backed by a well-considered discounting strategy. While a pricing and offering strategy will help you determine target segments, the offerings for each segment and the price metrics, you still need to design the discounting strategy to help you effectively negotiate contracts and meet your revenue targets. When designing the strategy, consider the:
- Buyer’s willingness to pay based on perceived value.
- Costs of serving a customer segment.
- Strategic importance of the customer.
- Customer’s purchasing volume or value.
- Customer’s propensity to buy more than one of your products.
- Degree of penetration you have and the share you aspire to obtain.
- Customer’s ability to control purchasing across their affiliates.
Discounting strategy is a key component of an effective contracting strategy and should be based on price integrity. Furthermore, it should be logical, defendable and drive the right customer behavior at all times. Conducting a discount prioritization exercise based on your customer segment and creating the right governance process around discounts and rebates is critical to your contracting and financial success.
- Develop an analytics-driven contracting optimization capability. To realize your financial targets, it’s important to continually measure the success of your contracting strategy, leveraging data and analytics to optimize it. You will need to build a mechanism to measure contract compliance and monitor whether contracting elements are yielding the expected profit for each relevant segment. You will need to build data management and analytics capabilities to run pre-deal and post-deal analytics to improve your deal health. Use these capabilities to generate insights that can be shared internally and with customers. These insights can enable a healthy, fact-based dialogue on tactical topics such as contract compliance and more strategic topics such as annual business reviews, solution co-creation and partnerships. This capability will ensure that you’re creating a learning organization, optimizing your contracting strategy continually, and more importantly, create stronger customer relationships.
Contracting strategy is where your pricing strategy meets the customer, and hence a lot of rigor needs to go into how you design and execute contracts. Keeping the five considerations described above will ensure that you positively impact your firm’s profitability as well as create the right customer experiences and behaviors.
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