The Pacemaker

AUTHORS

Andy-kach_thumbnail
Andy Kach
Principal
Bhargav_Mantha_thumbnail Brian_Chapman_thumbnail
Brian Chapman
Principal
Maria_thumbnail Matt-Scheitlin-London_thumbnail Tobi_Laczkowski_thumbnail Will_Randall_thumbnail

Latest Posts

What’s Driving Medtech Price Erosion?

Posted by Brian Chapman on September 3, 2019



This blog post is the first in a two-part series about what’s behind price erosion in medtech and how to reverse it.

Price Erosion-1Medtech leaders today face several headwinds that are threatening to erode price and profitability. Some of these forces are external—like the professionalization of purchasing, provider consolidation, a changing buying center and increased focus on product value—but others are internal habits and mindsets that are long overdue for a change. In our next post, we’ll discuss how medtech leaders have begun to address these challenges, but before we do, let’s define their root causes.

Recently, I sat down with Bhargav Mantha, who leads ZS’s medtech analytics practice, to ask about the causes of price erosion and discuss strategies to preserve profitability. Here’s the first part of our conversation:

Q: We’ve been managing price erosion for a long time in medtech. Suddenly it’s become a bigger issue for executives. Can you help me understand why?

A: It’s a mix of external factors and internal habits. One external factor is the consolidation of providers. There’s increasing negotiating power in the hands of the bigger providers and GPOs. That has resulted in a greater need for pricing transparency in medtech. The other trend we’ve seen is the increasing sophistication of the supply chain. We’re seeing purchasing become more professional. As you’re aware, up to 40% of hospital costs are supplies, so that’s a big item. Providers are spending a lot of time upgrading their procurement function with the rise of procurement consultancies. That’s also resulted in pressure on medtech suppliers to look at their costs. The third is a change in the decision-making process. For many years, medtech used to thrive on product innovation and made good profits by focusing on the clinical value, as the key was the physician. Now the buying power has shifted from clinical decision makers to economic decision makers who could be the head of the supply chain, chief procurement officer or even the CEO, so medtech companies have to think about their economic value in addition to their clinical value.

There are also some internal habits leading to price erosion. Medtech product sales have traditionally been commercially driven, less about the economic or clinical value and more about the relationships that sales reps have formed with their buyers. The win-at-all-costs mentality that medtech sales people had to preserve their territories and accounts resulted in some tension between the commercial team and the pricing team. Second, with this increasing focus on economic value, commercial teams are struggling to adapt and upgrade their negotiation skills and their ability to communicate value.

What this all means is that not only do medtech companies need to look at their overall pricing execution infrastructure, they also need to ask if they have the right governance. Do they have the right competencies? And they need to look at some key enablers like data and analytics that will provide greater insights into price drivers and hence optimize pricing decisions.

Q: Do you find that pricing and commercial each understand who should own average selling price? Do you see more of an adversarial relationship between the two groups?

A: There is no clear ownership of pricing and that’s a problem. Price is a collective responsibility of all parties, including commercial teams, business unit leaders and the pricing and contracting function. We have made a few observations about why medtech companies can’t get the prices they’re setting. One is, like I’ve mentioned, because there’s no incentive for the commercial teams to preserve price over focusing on the top line, leading to ongoing tension between pricing and commercial teams. This tension results in limited governance of pricing policies and parameters. Secondly, there isn’t much thought given to an offering strategy. Are we able to communicate value for each customer segment and have a price corridor for each segment? Medtech hasn’t really given much thought to some of these parameters.

The other issue is limited use of analytics and data. To arrive at optimal pricing decisions, data and analytics need to be leveraged the right way. It’s a little embarrassing that medtech companies know less relative to their customers about their own pricing performance given the customers’ investments in the procurement function. For example, they don’t have visibility into the average selling price being offered to all the affiliated accounts within an IDN, leading to pricing inconsistencies. There have been instances where our clients have been audited by some of the GPOs and their customers because of this inconsistency.

The other observation is a general lack of sophistication during deal design, an area where analytics can add huge value. Today, companies scramble reactively for data when responding to an RFP, and their ability to analyze what will make a deal optimal is limited. Moreover, even after the deal is signed, there’s no mechanism to monitor the compliance or the performance of that contract against the initial terms and conditions. Companies give a lot of rebates and up-front discounts to gain market share and volume, but there’s no visibility into the ROI of these discounts. Then there’s the issue of limited investment into tools, platforms and processes, constraining the potential of analytics, and operations becoming inefficient and people-intensive.

Clients are feeling these limitations. They’re getting into sub-optimal deals. There’s operational inefficiency creeping into pricing and contracting, and costs are high, too.

Thanks, Bhargav. And fortunately, these problems are solvable. In our next interview, we’ll talk about some positive pricing and contracting stories.


RELATED CONTENT 

BLOG POST: Reversing Medtech Price Erosion

BLOG POST: Acing Medtech Pricing 2.0 With Analytics

BLOG POST:  Your Pricing and Contracting Practices


 

Topics: Bhargav Mantha, medtech, Brian Chapman, commercial excellence, pricing optimization, commercial strategy, pricing, pricing and contracting, medtech commercial model, price erosion, medtech pricing

Click here to subscribe to The Pacemaker

Leave a comment

AUTHORS
Brian_Chapman_thumbnail
Brian Chapman
Principal,
ZS Associates
Tobi_Laczkowski_thumbnail
Tobi Laczkowski
Principal,
ZS Associates
Will_Randall_thumbnail
Will Randall
Manager,
ZS Associates
Matt-Scheitlin-London_thumbnail
Matt Scheitlin
Associate Principal,
ZS Associates
Andy-kach_thumbnail
Andy Kach
Associate Principal,
ZS Associates
Bhargav_Mantha_thumbnail
Bhargav Mantha
Associate Principal,
ZS Associates
SUBSCRIBE

Get 'THE PACEMAKER' Updates

Subscribe to receive email notifications whenever new blog posts are published.

×

Subscribe by Email

Search by Topic

see all