An MD&DI December 1997 Column
What medical product manufacturers need to know to expand their businesses.
Before the end of the decade, not only will medical product manufacturers have witnessed a number of significant structural changes in their selling relationships with health-care institutions, but they also will have initiated some new ways of conducting business themselves.
In fact, most manufacturers have already experienced a few of the structural changes that will affect their selling efforts for the remainder of the 1990s and well into the next millenniuma reduction in the number of suppliers, an increased number of administrators with purchasing responsibilities, and greater emphasis on delivery speed, global pricing, and contract negotiation. In addition to these buyer-related changes, manufacturers will also see changes in the ways in which they competenew marketing options will arise, alternative methods of selling will develop, customer service activity will increase, selling to customers based on how products and services will affect their bottom lines will be taken to a new art with sophisticated financial models, and the use of outcomes data will become even more prevalent.
As experienced manufacturers might surmise, market segmentation, customer selection, efficient value creation and delivery, and effective selling are a few of the keys to charting a course to profitable growth in this shifting landscape. Such are the findings of a new poll conducted by Sibson & Co., an international management consulting firm based in Princeton, NJ, in cooperation with Medical Device & Diagnostic Industry magazine. Medical device industry professionals with executive responsibility in the areas of sales and marketing were queried about how managed care and integrated health-care systems have affected their sales strategies, including the tools and messages they use when communicating with customers, how much sales efforts are costing their companies, and how they are striving to meet customer needs. Eighty-five professionals responded, and their answers offer insights into sales strategies in the industry.
THE CURRENT ENVIRONMENT
Changes in acquisition practices by health-care institutionssuch as increased purchasing under contract, decreased or level contract compliance, an increased number of administrators with purchasing responsibilities, or a greater emphasis on pricecan severely restrict a firms ability to grow profitably, let alone maintain market share.
Responses to this survey suggest that health-care buyers negotiating power is increasing significantly because of changes in acquisition practices. As a result, overall sales growth is spotty (only 55% of participants have experienced sales growth), in large part due to more intense competition for market share and higher customer turnover. In fact, when respondents were asked to select a company goal from five provided objectives, "grow market share" garnered the most first-place votes, while "build customer awareness/loyalty" followed in second place. "Build adaptive/flexible organization," "product development," and "reduce customer cost" were the other objectives offered. (See Figure 1 for details on managed cares impact on manufacturers sales and strategies.)
Figure 1. Managed care and integrated health-care delivery systems are changing sales methods, increasing manufacturers activity in these charted areas.
Participants also indicated that account penetration is shallow (two-thirds of respondents have seen no growth in sales from group-purchasing contracts), signaling that manufacturers are having difficulty amassing greater share within accounts. Finally, survey responses suggest that administrator prominence in the buying center is increasing significantly, resulting in increased emphasis on price, particularly in pharmacy, surgery, radiology, and pediatrics.
In the wake of this arduous, low-yield progress, its not surprising that many firms have attempted to increase their negotiating power by focusing on value-added programs, team selling, interactive relationships with customers (consultative selling), outcomes data, customer service, and new sales methods. For example, 35% of the respondents indicated that they had increased the importance of value-added programs, while 54 and 53% have increased their use of team selling and consultative selling, respectively (Figure 1). Eighty-four percent of respondents who conduct outcomes research report that they do so to add value to the selling effort (Figure 2). These responses to changes in the selling environment are typical of those from all types of medical product manufacturers surveyed.
Figure 2. Survey respondents collect outcomes data for a variety of reasons.
Still, efforts to increase sales arent working consistently, despite the considerable time and resources invested in these areas. This added cost is reflected by survey participants; more than half said sales costs were increasing as a result of higher compensation costs and an increased number of reps in the field. This often plays itself out as follows: When a manufacturer pursues business with this new sales formula, a layer of acquisition cost is added that places a premium on winning business at a reasonable margin. The trouble is, as medical product manufacturers know all too well, little businessparticularly new, high-volume national account businessis won at stellar margins. In fact, it may take years to mine the value of a national account and cover a companys acquisition costsor even to break even.
As managers become more attuned to the national or new-account phenomenon through the application of new sales models, they inevitably ask themselves a series of questions: "How can I increase returns on this effort? Should our sales strategies be changing? Should our delivery system be enhanced? Should we redistribute our selling effort across new and existing accounts? Or should we explore new, lower-cost channels of distribution?"
The responses to this survey provide some answers to these questions. First, in their interactions with new and existing accounts, participants indicate that they have focused their discussions with buyers on three points: products (74%), cost savings (64%), and quality (62%). One possible reason: an effort to enhance their selling propositions. The good news is that this approach seems to help manufacturers get contracts with institutions. In fact, respondents report that the quality of their product (65%) and low prices (62%) most often secure a place on a buying groups preferred-provider list (Figure 3). In addition to discussing products, quality, and savings, half of the manufacturers that responded to this poll frequently offer solutions development.
Figure 3. Manufacturers must talk quality and cost to close the sale.
Second, customer service is an increasing source of leverage for manufacturers seeking to enhance their delivery systems. The survey results indicate that not only are manufacturers increasing the number of customer service personnel45% have increased the size of customer servicebut they are also expanding customer services role (Figure 4). Nearly 65% of respondents indicated that expanding their service offerings is a critical ingredient in customer service. This expansion often takes the form of complimentary, value-added services that are strategically positioned to offset price pressures. For example, to ensure their customers machines operate at peak performance, a number of diagnostic equipment manufacturers offer more-frequent calibrations or consumption audits to high-volume users at no additional cost. In other cases, manufacturers are using customer service as a selling resource: 55% of the respondents indicated that they were increasing customer services role in selling. While the results of the survey do not clearly articulate whether customer service agents are selling to new or existing customers, or both, it is clear that most manufacturers are using customer service reps to increase their market share with existing customers.
Figure 4. Customer service departments are expanding their scopes.
Third, although the use of alternative channels of distribution has received significant attention as a key ingredient of managing sales cost, this strategy has not proliferated in medical manufacturing. Respondents to the survey said that they have explored the addition of contract reps, telemarketing, manufacturers sales reps, and on-line purchasing. However, fewer than one-third of participants have increased the use of these channels. Surprisingly, however, 37% have increased their use of distributors despite manufacturers inability to share a significant proportion of the asset and pricing risk with distributors. Previously, manufacturers have also shied away from distributors because of a lack of willingness to offer distributors incentives, through price concessions, to report end-user data.
THE NEW COURSE
When viewed collectively, the survey results paint a picture of tremendous change in sales of medical products: the number and types of buyers are increasing dramatically, manufacturers are struggling to sell value and are increasing their focus on existing accounts while working hard to wrest share from competitors, and new sales methods are slowly being evaluated.
To harness the energy of these changes to drive profitable sales growth, manufacturers must:
- Focus their team and consultative selling efforts. To sell effectively employing these efforts, firms must concentrate on the right buyers, including senior executives, and ensure that all value interestsincluding costs, marketing, operations, and clinical outcomesare addressed. One successful medical product company recently modified its sales organization to sell across physician and management ranks by deploying clinical specialists to make the clinical and operations case for its products and senior account managers to make the cost and marketing case with management. Selling from the top down and bottom up has enabled this manufacturer to forge relationships that allow it to address clinical, operations, cost, and marketing value interests in the purchasing process. For this manufacturer, reorganizing to address each of these interests has reduced selling costs, increased account retention, and improved the firms ability to differentiate itself from the competition.
- Effectively bundle selling propositions and create a total solution (addressing products, quality, and cost savings) for health-care institutions. To construct a complete bundle of selling propositions, manufacturers must develop specific, quantified value propositions to articulate how their products, quality, and pricing will help health-care institutions make money. To ensure maximum effectiveness, value propositions are usually combined in a financial model that accounts for the full range of value created by a product and its accompanying services.
To assemble an initial diagram of value as it aligns with customer profit drivers, one leading manufacturer created value trees that tie its products specifically to customer economics, enabling its sales reps to quantify value associated with each profit driver and the overall impact of its products on its customers profits. With this selling tool, the company has been able not only to protect its margin, but also to differentiate itself with financial buyers and management.
- Learn each purchasers minimum acceptable level of value and the resources required to deliver that value. In addition, sales reps must be prepared to gather data to determine the amount and type of resources required to deliver the proposed value. Once thresholds and resource requirements are known, the right delivery system (be it customer service or another delivery system) can be created to deliver enduring value to customers.
By pinpointing the threshold value and resource requirements from its customers perspectives, another manufacturer was able to focus specialized service resources on its accounts instead of on more-expensive sales people who had previously performed the service role at a higher cost with lower customer satisfaction.
- Determine which order characteristics (buying processes and behaviors) make customers profitable. Many leading medical product manufacturers have performed ABC cost analyses and profitability modeling to answer this question; however, sophisticated analyses may not be necessary to identify the largest and most controllable order characteristics affecting account profitability.
Armed with an understanding of the relative profitability and determining order characteristics of its customers, a manufacturer of surgical supplies was able to quickly make decisions about how to deploy its sellers across its account base. Interestingly, the firm found that its largest and fastest gains in profitability came from improving the profitability of existing accounts by altering the ordering characteristics of its largest buyers. Sibson & Co.s (Chicago) experience suggests that, on average, 40% of an organizations customers are unprofitable, creating significant opportunity to increase profits while avoiding the higher acquisition costs associated with new customers.
- Discover what sales methods customers prefer for product purchase. Although this prescription sounds trite, most manufacturers do not have a clear understanding of their customers purchasing requirements, and they have even less understanding of the service level requirements. Until this understanding is reached, manufacturers will have an extraordinarily difficult time matching service requirements with order characteristics and, finally, aligning sales methods with the most profitable customers. As a result, it should come as no surprise that leading manufacturers know how to use numerous cooperative sales strategies to focus the right resources on the most profitable customers.
A leading diagnostic device manufacturer recently learned, through intensive customer and rep interviews as well as cost analysis, that many of its customers wanted to buy from reps who worked directly for the medical device manufacturer. With this finding and a detailed understanding of the customers service requirements, the firm was able to move 2030% of its revenues to a lower cost of sales while meeting customers need for an alternative channel.
Although structural change in health care is unavoidable, a tighter course to profitable sales growth can be charted. The key to employing these recommendations lies in an organizations ability to assess which recommendations can be supported by sales staff and the organization. To gain momentum on this new course, remember what many leading manufacturers have learned: start with quick wins, maintain a customer-oriented perspective, and continue to apply key lessons from success stories. And, dont forget profitability growth is a long-term proposition, requiring incremental adoption of new techniques.
Thomas G. Knight is a senior consultant, specializing in sales effectiveness, for Sibson & Co. (Chicago). Kelley Johanning is an associate consultant for Sibson & Co.