Medtech Price Strategy: What Is Yours and Have You Tested It?

In the fiercely competitive and ever-changing business ecosystem of the medtech marketplace, the battle for market share since the pandemic has expanded to include a fight to protect net revenues and margins. This is a significant change from the 2010s, when product innovation and market disruption were the primary indicators of success. With disruptive devices, medtech companies could boost market share without being subjected to the challenges of downward price pressure.

This shift in market paradigm is driven by global healthcare macro trends that, especially when combined, create price pressure that will progressively grind down net revenues, margins, and profits if medtech companies don’t prepare and develop counterstrategies. It is anyone’s guess how long these macro trends will stay with us. Among these are:

New players changing the competitive landscape—Many have new pricing strategies designed to erode market shares of the existing medical device ecosystem.

An unyielding determination to reduce costs by customers—Hospitals, ASCs, and new sites of care want lower costs at the same level of service.

An expected increase in M&A—Life sciences deals grew by 23% in 2023,¹ a trend expected to continue based on 1H24 M&A activity and pent-up demand for new technologies by large medtech companies.

Patients becoming value-aware health consumers.

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FURTHER READING: 2024 Medical Device Manufacturing M&A Roundup

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Why This Is Important

In the past, when medtech firms were pricing a new device, they used a simple process of analyzing competitor prices. The next step would be to set the new device’s price at a slightly higher dollar amount than the aggregated prices of the competition, assuming the new device had competitive features justifying the higher price.

The medical device market was always considered a high-margin, high-profit industry.² However, as managing price pressure and profit margins become critical success factors, integrating price strategy into the business model will become a higher priority for medtech.

Although it was once thought a temporary issue caused by the pandemic, hospital customers have been undergoing long-term and substantial decreases in operating margins. Their continuing challenges include labor and operating cost increases, staff shortages, and reimbursement reductions. These factors all continue to fuel the healthcare organizations’ needs for cost containment from their suppliers. On the medtech side, the complex U.S. reimbursement system can appreciably change price/profit calculations, often after the device is launched. In addition, hospital administrators have become more expert in negotiating prices, making their leverage due to hospital size greater than ever.

There are many ways to manage profit margins, but pricing can be a fast and consequential lever for growing device margins. A word of caution—price strategy is a potent switch that needs prudent utilization and often requires validation to hospital value analysis committees through tools such as budgetary impact models.

To maximize the competitive advantage of their devices, medtech companies should investigate creating state-of-the-art pricing strategies that leapfrog competitors by justifying their device’s unique value and providing ethical incentives for healthcare customers to convert/buy.

From Single-Price Models to Creating Pricing Strategies

There are three steps in creating a price strategy. First is price building (the process used to establish price). The second is the compensation system (how payment models are created to address the financial needs of all customers to reduce obstacles to purchase). The third involves ethical opportunities to incentivize growth.

Price Strategies for Medtech Companies

Integrating different types of pricing strategies into a package to be offered to potential healthcare buyers will provide several innovative options. Some of the strategies companies should consider include:

Portfolio pricing: For medium to larger medtech companies with multiple divisions, a portfolio-based pricing strategy increases sales and protects market share erosion by offering incentives to healthcare institutions when they reach different levels of cross-portfolio spending through a particular period.

Outcomes-based pricing: If the device has clinical data, outcomes-based pricing ties the price of a device to its ability to reach specific outcomes such as shorter length of stay, reduced readmissions, improved surgical outcomes, etc.

Solutions pricing: There is value in shifting from selling products only to offering solutions for products and services that the healthcare customer values. For example, 66% of deaths from asthma could have been prevented with technology monitoring like connected or smart inhalers. A smart inhaler integrates connectivity with a mobile app. These devices are built with sensor technology to record data about the time, location, and date of use, as well as help build good adherence practices for the patient.³

Avoid Common Missteps

Misstep 1: Misaligned Price and Business Strategy
Many medtech firms view pricing as separate from strategic goals. Price is a key component of the 4P’s of marketing strategy (product, price, place, and promotion)—a core of business strategy. For example, price is key to a market growth strategy or a profit margin improvement strategy. For market growth, a competitive price is generally needed to expand the customer base. Increasing profit margins may require selling at a higher price point to a smaller segment of the customer base. Before analyzing a price point for medtech products and services, the role price will play toward achieving the business goals of the organization needs to be carefully considered.

Misstep 2: Including Gut Feeling or Anecdotal Data in Pricing Decisions
This problem has been around since the early days of medtech. Companies will price based on key opinion leader feedback, what has worked in the past, or legacy pricing models that aren’t functional in the present day. Executive management or others may decide on or try to influence price in a vacuum, based on their prior experience and gut feeling on market requirements. It is important to gather data on new customer and market insights to compare to gut feelings or anecdotal data in pricing decisions. Create a price strategy that aligns with current demand in the market and don’t leave money on the table.

Misstep 3: Not Segmenting Customers Before Starting Price Strategy Work
Especially in big markets, customers can have many different needs and other factors when considering their purchasing decisions. This can include price, support, device complexity, and more. Market segmentation is never easy but it allows the marketing team to generalize customers’ needs, preferences, and financial resources into addressable slices that can be used for all business planning purposes. This includes the creation of a refined pricing model based on customer segmentation that can appeal to the broadest customer base and amplify ROI.

Misstep 4: A Focus on Cost, Not on Value
It will always be important to assess the cost of a product but never use this as the only basis to set a price. The ultimate goal of a true marketer is to find a price the market will bear. The first rule of price strategy is to evaluate the price of the device against the benefits it provides and how it compares with similar devices in the market. Assess the value of your device by understanding the clinician’s needs and pain points. Don’t forget to assess and add the value of your brand reputation.

Misstep 5: Not Considering External Market Dynamics
There are multiple external factors that can affect the business and the clinicians and hospital administrators who buy your device. Failing to consider market dynamics like economic factors, supply chain shortages, etc., can affect profit. Market dynamics shift quickly and routinely. Medtech companies must recognize and check the factors that influence their business and build a pricing strategy that helps navigate and alleviate risk.

Misstep 6: Losing Sight of Your Competitors
Most end users will evaluate your device against competitors, weighing features, benefits, and price to decide which to use to support a buying decision. That makes the choice of price important—it can’t be so high it will stop customers from buying. Routinely evaluate the pricing of the strongest competitors and don’t forget potential disruptors. Develop the mindset that competitor pricing is part of their overall differentiation. Monitor what your competitors, especially large medtechs, are doing.

The Medi-Vantage Perspective

Medtech companies stand at a crossroads and the medtech market continues to change significantly. Many payers, providers, and patients are insisting the price of medtech devices have a direct relationship to the value they provide.

For the foreseeable future, price pressure is here to stay, and if not managed, will cut into the net profit and margins of medtech companies. Start incorporating price strategy into your business model. Join the 39% of medtech companies that use data to support their pricing and take a leadership role by shaping the market. 

References

1. tinyurl.com/mpo241001
2. tinyurl.com/mpo241002
3. tinyurl.com/mpo241003
4. tinyurl.com/mpo241004

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Maria Shepherd has more than 20 years of experience in marketing in small startups and top-tier companies. She founded Medi-Vantage, which provides marketing and business strategy for the medtech industry. She can be reached at [email protected]. Visit her website at www.medi-vantage.com.