This blog post is the second in a two-part series about what’s behind price erosion in medtech and how to reverse it.
Medtech is dealing with forces that have been eroding profitability. As companies look to repair this price erosion, they’ll need to adopt a more comprehensive approach to pricing governance and execution, which includes leveraging data and analytics to improve their pricing and contracting strategies.
I recently sat down with Bhargav Mantha, who leads ZS’s medtech analytics practice. In my previous post, I shared our conversation about the causes of price erosion in the industry. Here’s the second half of our conversation, which is about solutions.
Q: We’ve talked about challenges. What solutions have you seen? What are some positive pricing and contracting stories that we can share?
A: There are bright spots and leaders who have worked to address some of these trends. They’re able to preserve their price and have seen a 2 to 5% increase in earning solely based on better pricing discipline. It all starts with having a pricing strategy that’s well aligned with their overall business strategy. They have a sound pricing architecture that enables them to look at the needs of each customer segment and create a well-defined value proposition and a unique offering for each segment. They’ve trained their commercial teams to communicate this value, and they’ve invested in marketing that goes beyond clinical value and communicates the economic benefits of using their solutions, and these messages are catered to different stakeholders. They have also upgraded the negotiation skills of their commercial teams so they can engage with a highly professionalized procurement function.
When it comes to execution, they’ve done a few things. First, they have a well-defined pricing and contracting function that is owned by a champion who understands the value proposition of their products, who knows the business strategy and has a well-defined charter. They have KPIs to monitor the success of their own organization. They’ve defined clear governance policies that are well understood by all the teams. They have clearly defined roles and responsibilities, and strong collaboration between the pricing and contracting function, executive leadership and commercial leadership. They’re all aligned on the value that good pricing brings to the organization. There are set pricing processes. There’s a cadence for pricing reviews and exception management. They know exactly how exceptions should be governed. They have clear rules on what actions need to be taken when the price floors are broken. They have clear price corridors defined for every situation, every customer, every region and every product within their portfolio.
What we have also seen them do is attach a pricing and profitability goal to every function within commercial operations. There’s some incentive that rewards the commercial teams on profitability, and there’s understanding across the organization on the value that pricing excellence brings. They’ve also identified pricing champions from their commercial teams who have developed best practices for communicating value and price preservation. There’s a clear communication strategy around the importance of price and profitability across the organization.
In terms of enablers, they have a broad understanding of the value that analytics bring, and they’ve invested in it. They have the organizational mindset that pricing positions need to be data-based and built over time because of the unique relationships with customers.
They’ve also invested in the right data assets. They have a data strategy that enables them to look for data assets that will help them make better pricing decisions. They bring internal data such as historical sales data, contracts, master customer and products data, cost and rebates, and they pull in external data sources like syndicated procedure data and pricing benchmarks data. Then they put it all into a single data foundation.
They’ve deployed a whole range of sophisticated analytics, from simple models such as a price-volume graph that provides consistent pricing and rewards loyal customers to more sophisticated models that help them choose a discounting strategy or predict price erosion, for example. They’ve also invested in contract decision support capabilities, enabling them to do better pre-deal and post-deal analytics, leading to more optimal deals and better contract compliance.
Q: At some point while I listened to everything you described, my head started spinning. I’m an old marketer at heart. For anyone reading this who’s like me, where do they start?
A: I think it all starts with an executive mandate where there’s an acknowledgement that price erosion is an important issue to tackle, that profitable growth is everyone’s business and that price preservation is critical to drive your two engines of performance and innovation. Once you’ve acknowledged that and understood that your business strategy entails a robust pricing strategy, that’s No. 1. Second, make sure that once you’ve acknowledged the need to address these headwinds, create a vision and charter for this organization around the rallying cry of long-term profitability. Then map your pricing needs to the key capabilities that you want to invest in, whether it’s better governance, better analytics or technology.
Once they’ve defined that charter, then we encourage them to benchmark their current capabilities, create a blueprint of required capabilities and convert the blueprint into a road map with a set of prioritized initiatives they should focus on over the short term, midterm and long term.
They should then focus on the “quick win” initiatives, ones that provide the highest ROI. It doesn’t need to be a big bang approach. It should be an agile, iterative approach. For example, they could quickly deploy a price-volume curve or a profit waterfall model across all their customer segments, product portfolio or market to see if they’re providing consistent pricing. Or they could deploy a deal-score model that enables them to measure the health of the deal, both qualitatively and quantitively, before it’s submitted.
If their infrastructure is lacking, they could either invest in their own infrastructure or, better still, partner with analytics services providers who could run this capability as a service. While they invest in this capability, they also need to make sure that they’re able to align key stakeholders on the value of data-driven decision-making.
It’s a journey. It does take time. But if medtech companies are aware of these headwinds and they have the organizational mindset to be proactive, they can create a road map that will not only give them some quick wins but also lay the foundation for long-term, sustainable, profitable growth through better pricing and contracting analytics and governance.
BLOG POST: What’s Driving Medtech Price Erosion?
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