Aaron Goff co-wrote this blog post with Bharat Bhatia.
This is a time of heightened anxiety across industries, including medtech. As the impact of COVID-19 ripples through the market, leaders may find themselves looking around their organization for levers to pull to blunt this blow to business. Pricing and contracting is an area with a lot of tempting levers to pull. However, acting instinctively and without a plan can easily end up doing more harm than good. Leaders need to define short-, medium- and long-term pricing and contracting strategies to mitigate revenue leakage and maintain average selling price and market share to make the most of recovery and create resilient processes for long-term success.
Short term: Be careful but flexible
Leaders should approach customers during this time with a true partnership mindset. This is a stressful time for hospitals and health systems, and it’s important to work with them as trusted partners. Changing contract terms and obligations will definitely be within in scope for many industries, but a disciplined approach to these changes is necessary. Start with setting up a response and guidance team made up of stakeholders from your pricing, contracting, sales and marketing groups. Be selective and targeted in deciding on which commitments to relax and which to maintain by looking at product applications and demand. Messaging to providers should make clear that any relaxed contracting terms or price changes are not a "new normal,” but are the company's good faith attempt at partnering through this hectic period. Short-term contractual changes should be coupled with longer-term changes that prepare for the eventual recovery. For example, combine two or three quarters of rebate thresholds to let the customer know that the same rebates are still available to them as long as a strong recovery period makes up for the immediate downturn.
Deciding which contracting levers to pull should be evaluated through the lens of product, services and business terms. While it is advisable to maintain the core pricing to not “give away the farm,” increasing service model level at no extra charge or extending payment terms can ensure customer loyalty and retention. While offering these changes, remind the customer that you are providing them a value-added service at no extra cost.
Medium term (“new normal”): Set up for a recovery, but don't give away the farm
Something all leaders can agree on is that this pandemic will eventually end and business will recover. Business leaders must plan for this recovery to set up their companies for success. For example, there will be a surge of elective procedures done once people feel safe enough to enter medical care facilities. The questions to ask are:
- Where will these procedures be done first?
- Will those facilities use my product?
- What sources of leakage can I address before then?
- What efficiencies can I gain before then?
Ambulatory surgical centers may see an uptick in these procedures first as they will no longer be inundated with COVID patients. Having mutually beneficial contracts in place with these facilities well before the elective procedures pick back up will ensure they purchase products and that the business reaps the benefits. However, keeping normal contract terms in place with other providers could lead to profit leakage. For example, before the recovery, you should stop offering bulk discounts to customers, which would normally reward them for large purchases, because there should already be an uptick in usage after the pandemic. The same can be said for high-reach rebates and other rewards for customers having strong quarters. To set thresholds, look to historical analogs and other countries that are further along in recovery, such as China, to shape your recovery strategy. There is thus an opportunity to revisit the status quo and re-evaluate commitments and policies for key customer segments.
Having the proper analytical capabilities will be crucial to tracking the crisis and status quo recovery processes may not work during the fast-paced recovery cycle. This period could be the right time to change processes and build solutions to facilitate a strong recovery. Payoffs from increasing efficiency through automation and digitization will be multiplied during a period of strong expansion, which we can expect during the recovery period.
Long term: Seize transformation opportunities
While the COVID-19 pandemic is undeniably harmful to our lives, communities and businesses, it does present an opportunity for self-assessment and potential business transformation. The transformation will primarily be driven by your digital capabilities but more importantly will focus on newer, “as-a-service” business models, whether they are subscription based, consumption based or output based. Changing your pricing and contracting strategy in tune with these business models will be a great opportunity to realize mutual value. Moreover, investing the analytics capabilities and tools will enable this transformation much more seamlessly. For example, businesses that have strong revenue management systems in place can execute digital contract approval workflows, track sales impact across customers and dynamically alter contract terms in response to market changes
Now is the perfect time to enhance or overhaul your pricing and contracting strategy to demonstrate customer centricity, value and agility to serve your business better in the long term. Use the current challenges to figure out where to invest next. Times of emergency are stressful, but they also help us prepare for the future.
For more ZS insights on the impact of COVID-19, visit zs.com/COVID19.