Pricing innovation can be a highly complex decision and one of the more challenging tasks marketers face. With all the time, resources and money invested in bringing an innovation to market, there are often great expectations for the technology and for the profit impact on the company. Many times, however, pricing mistakes are made that cost the company money.
According to one publication, 80-90% of new products are under-priced (Marn et al, 2003). In one academic study, researchers showed that inappropriate pricing practices led to a decline in new product performance and a loss of any competitive advantage (Ingenbleek et. al., 2013). The root cause of an inappropriate pricing decision was a failure to consider all factors and a lack of clear pricing objectives.
For medical technology (MedTech) innovators, pricing a new solution can seem even more challenging. This is due to a number of factors not present in other markets. One key factor in MedTech is the role and influence of numerous stakeholders involved in access and utilization decisions (physicians, providers, insurers, value analysis committees, health technology assessment groups, group purchasing organizations (GPOs), government regulators, etc.). Another key factor leading to complexity of a decision is reimbursement and funding. Different reimbursement mechanisms (diagnosis related groups – DRGs – vs. value-based purchasing vs. global budgets), evidence requirements, and health systems make Medtech pricing more complex.
Top 10 Pricing Mistakes of MedTech Innovators
Here are the top 10 pricing mistakes that MedTech innovators make.
Mistake #1: Unrealistic or no value analysis – Value should be the foundation of the pricing strategy. This includes clinical, economic, strategic and emotional value. It’s important to be clear and realistic about the value. It is critical to understanding the true cost offsets, customer economics, and who receives the value from the innovation.
Mistake #2: Missing a critical input – Good pricing strategy should require a holistic review of critical inputs. These include cost, competition, channel, capacity, customer value, reimbursement, etc. Missing a key input can lead to the wrong strategy.
Mistake #3: Poor segmentation – If the technology has the potential to be used in different clinical applications, indications, settings of care or patient subpopulations, there will be a significant value variation. As a result, the price potential could vary significantly across segments. Value across markets will differ and pricing and launch strategy should consider this.
Mistake #4: Not understanding the role of pricing and other factors in new technology adoption – There are many factors that impact technology adoption. Price and economics are just two. Often the lack of adoption of a technology has less to do with its pricing and more to do with other factors (for example, insurer coverage). For a more comprehensive view of barriers to adoption see Everett Rogers.
Mistake #5: Starting too late – Pricing is sometimes an afterthought. Pricing work should begin at the idea/concept stage and continue through the new product development (NPD) process.
Mistake #6: Lack of alignment – The pricing strategy and the evidence development plans, payer strategy and marketing investment and objectives need to be in alignment. A premium price won’t work without investments in evidence development, payer related market development, and marketing.
Mistake #7: Relying too heavily on pricing market research – Pricing market research can be a helpful input to the strategy. It should, however, be one of many inputs used in the decision process. Any pricing research is “stated preferences” and actual buying behaviors can vary for a variety of reasons.
Mistake #8: Not understanding the price-volume-profit trade-off – There are many ways to estimate the price-volume relationship. These methods range from simple and cheap to complex and expensive. You should try to get a sense of the profit impact of different price-volume scenarios and estimate the impact of price on adoption.
Mistake #9: Tactical and/or implementation issues – While the price level is important, it is equally important to consider the price structure, price implementation, and different ways to monetize the value. This includes the list price, a floor price, price metrics, fences, bundles, offering strategy, and discount strategies. In addition, formalizing price rules, guidelines and a price management process is necessary to avoid price leaks.
Mistake #10: Not preparing sales – New technologies don’t sell themselves. The sales team has to drive it. All the good work done to develop a robust pricing strategy is lost if you don’t prepare the sales team to sell the value and defend the price.