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Value-based pricing: moving away from product features

Value-based pricing

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“How much should I charge for my medical technology?”

This is one of the most common questions managers ask themselves (and ask us, at ValueConnected) when planning to launch a new product and/or enter a new market. People ask this question so often because after clinical outcomes, pricing can be considered the main driver for the adoption of a medical technology. After all, no other industry launches more products per week (yes, per week) than the medical technology industry. If a medical product is wrongly priced this can block that product’s access to entire markets, potentially opening opportunities for dozens of similar and competitive solutions

There is unparalleled pressure on manufacturers from buyers, hospitals, doctors, group purchasing organizations and other stakeholders to reduce prices or to prove that medical technologies deliver substantial value. We at Value Connected understand value-based pricing to be the “process of determining the optimal price for a medical technology, based on its clinical and economic outcomes”.

It is time to forget “willingness to pay” and instead talk about value.

Doctors will love our product…

Medical device companies have typically operated under the assumption that if they build quality devices, doctors would love such technologies, and if doctors love their products, hospitals would then buy them.

However, the increasing focus on cost containment has been met with a demand for compelling economic data; a demand that doctors are not always comfortable with. Thus, it is the role of manufacturers to understand and incorporate the payer perspective and data requirements into their marketing strategy and product development.

Quantifying value

Take a minute to answer the following question: what is the value of your product? In almost all cases, manufacturers will describe value in subjective terms:

  • “Our product is easy-to-use”
  • “We have a more advanced solution”
  • “The technology can reduce costs”
  • “Doctors love our product” (why not?)

There is nothing inherently wrong with these statements. Yet, they do not represent value, as they are not quantified.

The best approach to quantify the value of your product is to understand and measure the clinical and economic impact it creates.

Take for example one of our customers who launched a new product in a commoditized area in Germany. They defined the value of their product by stating: “our product is easier to use”. No wonder they did not see a significant increase in sales over the last six months.

Taking this a few steps further, our analysis indicated the easy-to-use generated timesavings of 22 minutes per procedure. The next step was then to assess the relevant procedure cost matrix to identify time-dependent costs (such as surgical room use) and estimate the potential cost-savings. In short, the value was defined as “a technology that saves 15% of procedure time, generating cost savings of around EUR 325 per procedure”.

Defining the price

The same client also defined their price based on an artificial benchmark; they would charge the same as competitors that offered similar solutions.

This approach created a problem that the client did not anticipate; if you charge the same as your competitors in an established/mature market, decision-makers will focus on the next variable to decide, which is the relationship with the client. As the ‘new kid on the block’, our client would still need to invest months before generating sufficient relationship with doctors and hospitals.

On the other hand, the company now has objective and real data demonstrating the value of their products in numbers. Thus, there is solid evidence that demonstrates a tangible benefit, which in turn more than justifies the price of the product.

Final considerations

While there are several aspects to consider for pricing, companies should definitely aim to measure what outcomes they are improving or problems/complications they are avoiding. Most medical products help to avoid a certain problem, it is important to determine how often these problems occur and what the costs of solving them is.

In the era of cost-containment and value-based healthcare, we must keep in mind two very important statistics; on average, medical technology represents less than 7,5% of total healthcare expenditures in Europe, and less than 6% in the United States. We must ask ourselves why we focus so much on the price of medical technology if it only represents a small part of the total expenditure in healthcare?

Hint: try measuring how your technology impacts the other 92,5 to 94% of costs.

There are many more practical examples of value-based pricing and the positive impact on product adoption. To receive more information or discuss a particular value-based pricing approach, contact us at contact@valueconnected.com. We look forward to hearing from you.