From Design to Decline: Build in the value and capture it throughout the medical device product lifecycle
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Based on a plenary presentation I gave in June 2017 at the EBCG Medical Device 3P Forum in Berlin, this presentation covers: * How to determine the fundamental sources of value and benefit in Medical Device Innovation * Identify which healthcare ecosystem stakeholders will benefit * Define the offer to maximize lifetime value capture while reducing adoption challenges * Best practices for executing the price to maximize capture through the product lifecycle
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From Design to Decline: Build in the value and capture it throughout the medical device product lifecycle
- 1. From Design to Decline: Build in the Value and Capture It Throughout the Product Lifecycle Based on my presentation at the EBCG Medical Devices 3P Forum Berlin 8-9th June 2017 Ian Tidswell
- 2. 2© een Consulting GmbH 2016-17 Pricing provides the highest leverage profit opportunity 0% 2% 4% 6% 8% 10% 8% 3% 2% 11% Volume Fixed cost Price Variable cost “What’s the impact of a 1% improvement in each profit lever*? ● Raising the net price has a larger impact on profits than any other lever ● Potential profit improvement in many B2B companies: 2-5 points of revenue * For a typical Fortune 500 company “Pricing is the moment of truth – all of marketing strategy comes to focus on the pricing decision” - Raymond Corey, HBS
- 3. 3© een Consulting GmbH 2016-17 So if pricing is such a great source of value, how come so many companies struggle to get there? ● Complex topic: economics, psychology, channel partners, strategic relationships, dynamic ● Complex ecosystem (patients, payers, providers, government, etc.) ● Cross-functional collaboration: “Squeeze the balloon” fix one problem and something else goes wrong ● Leadership “don’t know what good looks like” and pressure to “make the numbers” each quarter ● Marketing sensitive to criticism of pricing skills ● Sales sensitive to losing control: “we know the market” ● Metrics polluted with other market changes ● Disparate systems, data not set-up to support pricing
- 4. © een Consulting GmbH 2016-17 4 Money is getting scarcer: healthcare spending has leveled off at 10% of GDP in EU28 -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2008 2009 2010 2011 2012 2013 2014 2015 Healthcare spending growth less GDP growth, EU28 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 2005-7 2007-9 2009-11 2011-14 Growth of Healthcare Spending by Source, EU28 Gov Out of pocket Spending increases are coming from patient out-of-pocket. EU28 Healthcare spending is only growing as fast as GDP. Source: “Healthcare at a Glance: Europe 2016, OECD Publishing Source: Eurostat 2015 Old-age dependency ratio (≥65 years / 15-64 year) An aging population will put continuing pressure on budgets
- 5. © een Consulting GmbH 2016-17 5 Healthcare spending implications for MedTech pricing • No or little net-new revenue overall: growth will require reallocation of resources from other healthcare spending • Critical to understand your value: cost reduction and cost efficiency will be key drivers. How can we take cost OUT of the system? • Careful consideration of the price architecture needed • Consider the impact of pricing on ALL healthcare stakeholders to identify value and mitigate impact on ‘losers’
- 6. © een Consulting GmbH 2016-17 6 How will healthcare spending be reallocated? US healthcare spending by type of care, 2013. Source: vizhub.healthdata.org US healthcare by type of care (2013 $2.1 trillion) US healthcare by cause (2013 $2.1 trillion) Pregnancy New born + dental
- 7. © een Consulting GmbH 2016-17 7 MedTech projected to grow ~5% pa to 2020: where will the growth come from? 16.1% 7.3% 76.6% Healthcare Expenditures Europe 2015, total = €1.5 trillion Pharmaceuticals, other medical non-durables Medical Technology In- & Out-patient care, other World MedTech market by area 2015-2022 Market Share, Growth and Sales WW Market Share in 2020 % Sales Growth CAGR 2015-22 5% Source: 2016 European Medical Technology Industry in Figures, medtecheurope.org WW Mkt Share 2020 Bubble size = WW Sales in 2022 Endoscopy
- 8. © een Consulting GmbH 2016-17 8 Need to know where your products and innovations add value! SourceofBenefit Cost Reduction Direct CAPEX Direct OPEX Indirect CAPEX Indirect OPEX Input Costs Staffing Costs Maintenance Patient Outcome Length of Life Quality of Life Predictability Other value Risk Level Option value Simplicity Reputation Loyalty Easiest to measure & capture More difficult to measure & capture Very difficult to measure & capture
- 9. © een Consulting GmbH 2016-17 9 Understand your innovations impact on stakeholders SourceofBenefit Cost Reduction Direct CAPEX Direct OPEX Indir. CAPEX Indirect OPEX Input Costs Staffing Costs Maintenance Patient Outcome Length of Life Qual. of Life Predictability Other value Risk Level Option value Simplicity Reputation Loyalty Patients Providers Payers Society ✓ ✓✓ ✓✓ ✓✓ ✓ /✓ /✓ /✓ /✓ /✓
- 10. © een Consulting GmbH 2016-17 10 A structured approach to price architecture design • Revenue targets • Drive profitability (mix, cost-to-serve) • Collaboration & Risk Sharing • One price for all • Segmented & Fenced • Negotiated • Incentives • Introductory • In advance (fixed) • At delivery • After delivery • Subscription and repeat purchases • Product / service delivery • Outcome based • Time (e.g. subscription, leasing) • Facilitation (broker, advertising, licensing) • Value • Market • Cost-plus • Identify patients and payer(s) • Discrete cost elements or bundles • Add-on options Offer Structure Price Mix Price Carriers End-Patient Segmentation Timing & Risk sharing Healthcare Partner incentives • For significant innovations, several options should be considered • Initial thought-testing should occur in R&D cycle
- 11. © een Consulting GmbH 2016-17 11 Iteration through the steps to optimize Offer Structure Price Mix Price Carriers End-Patient Segmentation Timing & Risk sharing Healthcare Partner incentives SourceofBenefit Cost Reduction Direct CAPEX Direct OPEX Indir. CAPEX Indirect OPEX Input Costs Staffing Costs Maintenance Patient Outcome Length of Life Qual. of Life Predictability Other value Risk Level Option value Simplicity Reputation Loyalty Patients Providers Payers Society ✓ ✓✓ ✓✓ ✓✓ ✓ /✓ ? ? ? ? Price Architecture Value Proposition Stakeholder Impact
- 12. © een Consulting GmbH 2016-17 12 During development and launch a structured approach identifies value, gaps and barriers Value proposition What are the sources of innovation value? How important is each source of value? What value barriers exist? What needs to be done to prove out the value? Architecture of pricing What are possible pricing offers? What price strategies are appropriate? What price carrier to use? How should customer prices be segmented? What incentives should you offer partners & customers Layout of Business What capabilities are required to create the value? What partnerships and channels are required? What cost and revenue streams need to be assessed? Upside potential How attractive is the business case? What assumptions needs to be true for the business case to be realized? Evaluation Is the innovation ready? Is the market ready? Is the business case attractive? Does it fit with strategy? How to address gaps & uncertainties? Opportunities, challenges and actions documented
- 13. © een Consulting GmbH 2016-17 13 Medical Device Produce Life Cycle Pricing Priorities Development Intro Growth Maturity Decline • Understand value potential & adoption barriers • Develop and test value proposition • Design pricing architecture • Build price metrics, tracking • Track pricing metrics • Refine value proposition • Refine price targets as needed • Execute and manage exceptions • Plan migration to new offer • Revise customer segmentation & pricing
- 14. © een Consulting GmbH 2016-17 14 Summary • Pricing (especially for Medical Devices) is complicated, but getting it right is critical • Increasingly constrained healthcare spending will make for a more challenging pricing environment going forward • There are tools to help identify and capture value via pricing • Value Proposition • Architecture of Pricing • Layout of Business • Upside Potential • Evaluation of status • Embed commercial design work early in development cycle and iterate to build out the pricing approach, identify and address gaps, and validate assumptions
- 15. © een Consulting GmbH 2016-17 15 Thank you! Ian Tidswell www.eenconsulting.com ian@eenconsulting.com “Pricing is the moment of truth – all of marketing strategy comes to focus on the pricing decision” - Raymond Corey, HBS