Soapbox

Five Margin Fortification Strategies for Medtech Manufacturers

By Dev Tandon
May 26, 2016


• Categories: 03-Manufacturing Execution, Business Analysis, Soapbox

The last few years have hit the medical device industry pretty hard. The Affordable Care Act’s 2.3% device tax and monitoring costs have hit company margins. The insurance reimbursement process has become so complicated and slow that it impacts the market more than the actual value it creates for patients. Seemingly daily evolving regulations are also squeezing margins.

Unfortunately, many medical device companies can’t avoid these industry changes and must strategize to improve their margins from a different angle. Here are five ways companies can to just that.

1. Use Analytics to Drive More Value

Many companies are raising prices to cover the industry’s recent changes, but most are going about it in the wrong way. The best way to drive higher prices without losing customers is to focus more on product and offer value instead of cost. Your customers don’t want to hear about how much it costs you to build and service the product. They want to know what’s in it for them.

So how do you find out what they value the most? Asking every single customer is a daunting task and makes uncovering these insights feel nearly impossible. Luckily, your transaction data is up to the task. Review past value additions and evaluate how customers reacted based on their willingness to pay for them. Following trends you uncover in your data, add and emphasize specific value propositions with distinct customer segments. Determine which additions resonate the most as a way to check your analysis. Once you have a prioritized list, strategically implement these value points across more customer segments.

If you’re concerned about putting more into your offerings than what you think you’ll get out of them, add more low-cost, high-value elements, such as support or virtual training. Use these additions as reasons for increasing prices to cover lost margins caused by taxes and reimbursement changes. Don’t forget the power of differentiation. If you have something your competitors don’t, leverage it! Keep commoditization and price wars at bay by delivering a unique offering that your customers value. As an added bonus, more value often leads to more customer loyalty, which is crucial for the industry now.

2. Carefully Segment Your Pricing

Before you get ahead of yourself, stop and consider if all of your customers value the same things. Most likely, they don’t. Consider, for example, the different needs between hospital and home health customers, or physician and long-term care customers. To improve margins, create unique offerings for each customer segment. This inevitably leads to creating custom pricing for each segment as well.

Segmented pricing gets a bad rap, because it’s difficult to implement. A huge amount of research goes into it, and as customer segments are in a constant state of flux, it never really ends. However, the improved margins you gain as a result are worth the hard work. Use the value research you complete in step one to categorize your customers by their preferences. Build a custom offering for each of these major segments. Create a starter pricing guide for these groupings that encompasses the offerings’ value delivered.

To further segment these customers, rank them by their willingness to pay the target price. Those who are resistant and demand rebates or discounts should be pitched an offering with less value. Those who accept prices with little resistance signal lost margins—they could be paying more. Recoup those losses with a minor price increase.

Whatever happens, price on value. If your customers want a price concession, they also must take a value concession. Train your customers to think about value, not costs.

You can take this one step further by using profit waterfall analysis to rank your customers by least-to-most profitable. Determine what sets the profitable customers apart, and use these lessons learned to increase profitability across the board.

3. Leverage Mix Shift

Medical technology manufacturers juggle many factors—differing volumes, prices and customer segments—all of which interact to ultimately affect margins. With all of these mix-shift elements in play, it’s difficult to determine the effect of one minor strategy change. This applies for reverse evaluation as well; it’s difficult to see the specific source of a margin change.

Many manufacturers tackle mix shift with top-down analysis. Unfortunately, this requires the use of plugs for the unknown data and variables. This analysis is really just educated guesswork, because it can’t account for all data in play. To really get to the bottom of margin change and therefore improve your strategy, build analysis from the ground up and avoid plugs altogether. This requires more time and better analytics, but the results are worth the effort. A true understanding of mix allows you to see the complete cause-and-effect relationship between your strategies and margin changes, backwards and forwards.

• With bottom-up mix analysis you can evaluate:
• How successful a price increase is at the customer and product level
• Opportunities to pass cost changes onto customers, such as passing on fees from the Affordable Care Act onto specific segments
• Specific opportunities in customer segments that may be trending in a different direction than overall mix shift

Understanding your mix shift is crucial during a time of squeezed margins. Dig into your mix data to find the insights that can make a big impact on your margins.

4. Consider Other Growth Opportunities

Once you nail down price, customer and mix changes, it’s time to consider other avenues of growth. As consumers have become more research-savvy and less dependent on medical providers, some medical device companies have made the jump to marketing and selling directly to them. Is this a possibility for one or more of your products?

This is also a great time for product experimentation and innovation. Monitor customer questions about functionality or requests to improve upon a product. Could you take your offering in a different direction?

You could even capture an entire new customer segment or market by improving upon your product or adding value elements you hadn’t considered before. Or, you could experiment with expanding into a completely new market.

Don’t forget to consider updating your marketing and sales approaches. The healthcare industry is becoming less about service and more about outcomes. Use your data to determine which outcome stories resonate with your audiences the most during sales and account management calls. Use these stories and the values they emphasize in your marketing and more sales pitches to effectively reach your target audiences.

5. Reduce Internal Errors

The tighter the ship, the higher the margins. If you can’t make any external changes to your products, customer segments, pricing or offerings, look inward instead. Every company suffers from internal, human errors. Inventory errors lead to inaccurate orders or pricing by volume. Invoicing errors miscalculate pricing, rebates or delivery times.

To reduce these types of mistakes, incentivize employees in a low-cost way in addition to the obvious fixes rooted in technology systems. Consider company-wide recognition or a half-day off for someone who makes the least amount of errors. To help your teams along, establish airtight procedures and fact-checking processes to minimize slip-ups.

Are most of your data challenges arising from issues within unorganized and messy data? Rally your team for an audit and overhaul. Establish data alignment between teams and train employees to review their data in parallel ways that all teams can understand. Review processes once a quarter to ensure all team members understand how to record and evaluate company data to keep big mistakes from slipping through the cracks.

A reduction of internal errors can have a major impact on margins, and it costs your company almost nothing. It’s a strategy you can’t afford to skip.

Stop the Squeeze

The regulations related to medical devices and their consequent margin squeeze on the industry aren’t going to change anytime soon. That doesn’t mean manufacturers and technology providers have to suffer. Achieve your full gross margin potential by getting creative with your strategies and building solutions related to the elements within your control.