Pricing a New Medical Device

The Story

A prospective client approached me recently who needed help in setting the price for the new medical device they were about to commercialize. We sat down to go over the project and they indeed needed help. The first thing he told me was that they needed a 65% margin and the fully burden manufacturing cost of the device was expected to be $50.00, the plan was to price the device at $150.00.

I said great! You have met your goals. He stared at me for a while and then said, “but I think it is worth a lot more than $150.00.” As he got up and started to leave I said, “Why do you think it is worth more than $150.00?” He responded, “if they use my device instead of how they do it today, they can save time, reduce nursing injuries, and reduce their stocking inventories”.

The prospective client had put the cart before the horse, and instinctively knew it.

Understanding the value proposition of the device (the devices utility), in the eyes of the clinician users and economic buyers, is the first step. Pricing is the monetizing of that value, the second step.

 Pricing Strategy

I am a big fan of writing out your pricing strategy very early in the commercialization process. Start with your financial goals, your unit / time goals, your situational analysis and the value proposition. Craft a sentence that best describes your intentions with respect to pricing an elevator speech for the sales force.

We will set our price, to ensure that we signal a congruent message with our value proposition, garner at least 50% of the added value of our widget, we will be profitable and we will be 80% confident that the price will not become a barrier to success in more than 20% of the A accounts.

 Pricing

The art of monetizing value, pricing, is just that an art. I have spent as much as $140,000 doing value + pricing studies. I’ve spent as little as nothing. You need to do a situational review before you set off on value or price determination. By understanding the situation you can “right size” your effort (risk stratify the work). This is especially important for start-ups who need efficiency over effectiveness.

With setting price, it is never one size fits all. Here is a partial list of the questions that will lead you to understanding your pricing situation better:

What is the nature of the product that you are launching?

  • Commodity
  • Line extension
  • Line expansion
  • New product area within your current portfolio
  • New portfolio
  • Disruptive technology

What is the nature of the market into which you are launching the product?

  • Current geography or new geography
  • New segment or current segment
  • New customer base or current base
  • New channel or current channel
  • Will there be value added services or not

Determine the risk if you under or over value the product?

  • How forgiving have your customers been historically
  • Do they give you second bites at the apple
  • What are the consequences if you price incorrectly out of the gate?
    1. Do you slow the momentum down
    2. Do you cast doubt in the minds of the customers about the value of the product
  • What will the competitive response be to a pricing error?

Watch out!

It is critical that your value proposition and your price point support each other. If you are talking about the device as, the greatest advancement of the therapy and you price it at the same price point of old technology, it sets up a disconnect in the hearts of the target customer. You have to resolve that disconnect before they will emotionally accept the value story.

Message Congruence
Message Congruence

So how do I set a price?

I am not trying to be disingenuous, but it depends.   As a general rule of thumb, I try to split the increased value with the customer. For example, if my perspective client demonstrated an increase in hard value of 30% over the current state of the art product, I would increase my price, volume for volume, by 30% over the competition, hoping to realize 15%.

Caveats

In the medical device space there are always nuances that need to be taken into account. Reimbursement and service line profitability are always two potential barriers to realizing the true value of a new product. If the hospital service can absorb the premium and there are savings within that service then you may get the full value of the device. However, when you are selling into a service line that is barely profitable and you are changing their reimbursement/cost relationship, you may not get all you had hoped for.

A Happy Ending

We did the work to determine the added utility that the product in question brought to the critical care nurses and it came out to a 100% increase over the current technique. Total cost for the current technique was monetized at $308.00. Some of that 100% was based on a reduction of inventory cost, some was on saving time and some was on increased safety for the nurses (a reduction in lost time accidents). So our hypothesized price point was $600, not the $150 that the client has targeted.

We tested the monetization with a few nurse managers and no matter how much evidence we showed them, they just could not get their minds and hearts to accept the $600 value. Strategically, if we had priced the device at the point that we could justify, we would have either slowed acceptance, lowered demand, or failed all together.

Because the risk of being wrong had both a high probability (based on the initial qualitative interviews) and a high severity (given the financial state of the company) additional testing was warranted. We surveyed 30 key customers in the US. We selected the Van Westendorp PSM technique as our methodology. We discovered that 65% of our 30 surveyed customers would consider the product a good value between $300 – $400 dollars. An additional 23% indicated that they would consider $400 – $500 too expensive for general use, but would still purchase the device.   Historically, I would have set the price point in the $450.00 range. There is typically a low bias when using survey methods to determine price points. However, in this case we set the Average Selling Price at $375.00 and held firm to that target.   List price was set at $400.00.

We exceeded the target profit margin, we garnered a premium over current technology, and we did not inhibit the sales process. A win-win-win result!\

“Experience is what you get, right after you need it most.”

Make it a great day,

Tim Walker

Tim Walker is the Principal consultant for The Experia Group. A small consulting firm that specializes in providing experience and expertise during critical device commercialization phases to increase the probability of success. www.theexperiagroup.com.

Annual Product Performance Reviews for Medical Devices

Last night, at 1:34 AM, I was awoken by a chirping smoke alarm, indicating that it needed to have a new battery installed.

After finding the ladder and the new battery, quickly making the change and jumping back into bed, I started thinking about how that experience paralleled my work history.

The Story

In the early 80’s, as a young product manager I received a call from a production supervisor telling me that my biggest selling, most differentiated, oldest, product line was suffering from a 10% manufacturing yield and that I should get ready for significant, sustained back orders. I wasn’t paying attention to my all-star product; I had moved on to more creative work. This is when I instituted the, “Annual Product Performance Review” (APPR).

Discipline vs. Creativity

If I had only replaced all the smoke alarm batteries when I was supposed to, I would not have been shaken from a good night sleep. Discipline often escapes the truly creative person. As a product manager you need both discipline and creativity. One way to manage these sometimes opposing attributes is to schedule the maintenance activities surrounding a downtime in your otherwise busy calendar. Never schedule them during sales meeting prep time, never during trade show season, etc.

Annual Product Performance Reviews, the minimum

I call this maintenance activity an APPR. As a product manager we have to care for our product lines, particularly when they have been on the market for a while and the excitement of the launch has worn off. Spending one day a year, on each of your product lines is a minimal amount of your time invested that could prevent you from being shaken from a good night sleep by an overlooked issue. What kind of an issue? Quality shifts, pricing slip, share slip, new competitive entry, shifting sales force focus, slipping gross margins, resurgence, increasing complaint levels all these potential issues are leading indicators of critical times for your product line.

The APPR can be done anytime of year. At its core, is a year-over-year comparison of key metrics. The more years you have data for, the more likely you are to see a trend. It is good to partner with finance or IT the first time you conduct this type of analysis to make sure your data sources are complete and comparable. For some product lines a monthly review may be more appropriate.

Each APPR took a day and included a review of the following metrics:

  • Units, total
  • Unit, mix
  • Average selling price (ASP)
  • ASP by mix
  • Complaint rate by type or category
  • Manufacturing yields
  • Gross margins (GM)
  • Revenue
  • Revenue distribution my geography
  • Revenue distribution by sales territory
  • Number of active accounts
  • Number of accounts that went inactive over the past 12 months

These metrics are all loaded into a simple excel file, which automatically did the year-over-year trend comparison and some simple charting. The output was the APPR dashboard. Often this dashboard pointed towards areas that needed my attention and a bit of investigative work.

Today, I have created custom dashboards in salesforce.com that provides real time comparisons for new product launches, after one-year the dashboard changes to a periodic based trend analysis that has taken the place of the APPR dashboard. The important thing is to monitor the product lines you are responsible for and take nothing for granted. This is a good application of the, “productive paranoia” concept that Jim Collins discusses in his book, Great by Choice.

A Happy Ending

So what happened with the product that had the yield issue? After managing a yield of 10% and all the logistical and customer service issues that resulted, for over a year, a new manufacturing process was validated and up and running.   The product was re-launched and regained 96% of it former share dominance.  The product was just that good. The customers allowed us a second bite of the apple.

Since instituting the APPR, have I been shaken from a goodnight sleep by unanticipated product issues?   Of course, the key being unanticipatedunpredictable or random issues.

“Experience is what you get, right after you need it most.”

Make it a great day,

 Tim Walker

 Tim Walker is the Principal consultant for The Experia Group. A small consulting firm that specializes in providing experience and expertise during critical device commercialization phases to increase the probability of success. www.theexperiagroup.com.

What is marketing?

By Tim Walker

What is marketing?

Have you ever tried to explain what it is you do and fumbled with the answer?   Explaining what marketing is to my father has proven a significant challenge. He grew up in a time when there was just “Sales”. I often tried to use the “Mr. Spock” quote, “The good of the many out ways the needs of the few, or the one.” The idea that Sales serves the one, Marketing serves the many. In a business-to-clinician (B2C) setting, sales and marketing are connected at a level that requires significant two-way communication. An interdependent relationship, neither can succeed without the other. Neither is first nor more important. Both are critical elements in the strategic marketing flow.

Strategic marketing flow

 Marketing defined

For me, marketing is the ethical application of applied psychology, with the intent of changing a targeted group of humans behaviors. In our case, delivering a message in the “language” of the user that will motivate them to modify their clinical practice, product choice or perception about their definition of value.

When I use the word “language” above, I don’t simply mean the words, or even the media, that they are delivered with. I mean the application of a deep understanding, at an emotional level, of the target audience. That you thoroughly understand what makes the target audience, mad, sad, glad, fearful, hopeful and envious. Understanding the full gambit of emotions that your target audience experiences in their practice and letting that come through in your messaging will help you connect with them, making your messaging all that much more persuasive.

 “Experience is what you get, right after you need it most.”

Make it a great day,

Tim Walker

Tim Walker is the Principal consultant for The Experia Group. A small consulting firm that specializes in providing experience and expertise during critical device commercialization phases to increase the probability of success. www.theexperiagroup.com.

Medical Device Marketing Insights Introduction

Introduction

Medical Device Marketing Insights is a blog all about the lessons I have learned over a 30-year career commercializing Medical Devices. Sharing these lessons with you is my way of paying it forward. Hopefully you will not make the same mistakes that I have by gaining some insight from my stories. All of the stories are based in real life experiences. I may, from time to time, disguise certain aspects of the stories, names, times, places, companies, etc. to protect the innocent.

Don’t get me wrong; I have had great success in commercializing medical devices in a wide range of therapeutic areas. I estimate that those devices produce some $300 million in annual revenue for companies whose names you would recognize immediately. More important to me than the revenue, is that these products serve thousands of physicians and other healthcare professionals every day so they have better tools with which to perform their miracles. Those miracles impact hundreds of thousands of lives each day. Family, friends and humans all over the globe are positively impacted by the work that we all do.

In time, I hope this blog will become a safe sharing site for experiences that, with a bit of insight from the readers, will provide wisdom for those who participate regularly.

Topics that I plan to write about include: pricing strategy, clinical messaging, trade show optimization, market research, positioning, value propositions and many more. With each blog posting I hope to provoke discussion, welcoming your comments.

“Experience is what you get, right after you need it most.”

Make it a great day,

Tim Walker

Tim Walker is the Principal consultant for The Experia Group. A small consulting firm that specializes in providing experience and expertise during critical device commercialization phases to increase the probability of success. www.theexperiagroup.com.

30 Years of Lessons Learned