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As we’ve heard many times, the traditional medtech operating model faces several headwinds: buyer consolidation, a focus on value and outcomes, increased cost-to-serve, and a change in buying preferences. All these trends have dealt a blow to medtech’s traditionally high margins and to a commercial model that was primarily sales-driven.
To counter these headwinds, medtech must leap forward to a pricing 2.0 model that ties pricing closely to clinical, economic, and psychological value (rather than a cost-plus approach). Medtech must also create a value communication strategy, customer incentives that increase share-of-wallet, and a more robust and customer-centric contracting and offering strategy. These strategies are essential. But are they sufficient to ensure that medtech can maximize its margins? We believe the answer is no.
Unless you have the right governance policies, execution discipline, and analytics, you won’t be able to realize your profitability goals. We have seen many clients make strides towards the right pricing strategy but continue to see price erosion and revenue leakage. These clients are struggling with tension between the pricing team and the field, business unit, or regional teams (which leads to limited governance); a lack of data and analytics about customers and products (which leads to limited visibility into pricing and contracting performance); and limited investments made in vital analytics and platforms (which leads to inefficient pricing and contracting operations.)
So, what can be done about it? The medtech companies we’ve seen successfully ride the medtech pricing 2.0 wave have been doing a few things differently in addition to having the right pricing strategy:
- They have a culture of collaboration and clear alignment on product value. There is a well-defined charter for the pricing function headed by a pricing champion with the kind of cross-functional experience that engenders empathy towards all parties. Price fences and guidelines are defined based on value. There is a strong social architecture and change management strategy that the pricing function leverages to communicate value to field teams, and pricing works with the field to implement the guidelines for their customers. There is adequate representation of the field, business unit, and the regions on the pricing committee. The pricing and contracting teams work closely to drive optimal contract design.
- They have robust governance policies. The field, business unit, and regional teams have well-defined ownership and accountability of financial incentives, usually structured on profitability rather than revenue. There are continual monitoring mechanisms on contract compliance and average selling price across product portfolios and customer tiers. There is adequate governance on data and analytics assets to ensure they bring value and enable decision making. There are robust exception management policies. There are well-defined KPIs (such as price point improvement, operational efficiency, reduction in cost-to-serve) that are monitored quarterly to measure the success of the pricing and contracting function.
- They have invested in the right pricing tools and platforms. Leading companies have invested in the right platforms, including contract decision support solutions to drive proactive deal simulations, scalable and intuitive dashboards serving insights on pricing and contracting performance, automated rebate management solutions, and self-serve ad hoc analytics tools that empower pricing and contracting analysts to drive insights. All these investments are seen to be purposeful and backed by the right business case.
- They have realized the value of analytics. The leaders of these organizations have invested in building and deploying several models that have driven better decisions. While some models are fundamental (profit contribution waterfall, price-volume correlation, or price corridor analysis), other models (customer discount prioritization framework, bundled pricing optimization methodology, price elasticity analysis) enable supporting a more complex set of business scenarios. (See the list of definitions below for more details.) More importantly, they have managed to build a centralized data foundation that acquires, processes, and standardizes all data necessary for pricing and contracting analytics (including rebates, pricing, customer masters, product hierarchies, and contracts) leading to improved trust in the data.
Progressing towards medtech pricing 2.0 requires not only a sound pricing strategy that aligns price to value but also some deep thinking into the governance of the strategy as well as purposeful investments in the right analytics and tools. Taking a more holistic approach towards pricing 2.0 would enable medtech to regain the leadership it once had on margins.
- Profit Contribution Waterfall: An analysis that gives insights into factors contributing to profit by breaking down revenue and costs into key components.
- Price-Volume Correlation: The correlation between price offered to customers and the volume bought. An analysis of price-volume correlation is conducted to understand the level of pricing consistency across customers based on the revenue generated.
- Customer Discount Prioritization Framework: Segmentation of customers based on several weighted factors such as purchase volume, purchasing control, strategic importance, cost to serve, etc., to decide the discounting strategy for each customer segment.
- Bundled Pricing Optimization Methodology: An approach that offers the optimal price for a product bundle to each customer segment based on consumption, share of wallet, and risk appetite. This methodology helps identify the right mix of products and services to drive share of wallet and profitability.
- Price Elasticity Analysis: Analysis to gauge customers’ sensitivity towards change in price by analyzing their buying behavior before and after price changes.