Strategic Pricing

Tackling Price Erosion in the

Medical Products Marketplace
By Lisa Thompson

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uccessfully pricing products and
services is one of the biggest chal-
lenges sales and marketing profes-
sionals face in companies of all
sizes. Convincing customers that
they should pay the price is an even bigger
challenge. Consider the following questions
■ Are more customers negotiating price
than ever before?
■ Is it difficult to convince customers
of the value of your products and
services?
■ Do you use price as a last resort to
retain customers when selling on
value fails?
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$ to help determine the success, or failure, of ■ Are you worried that customers might find out
about the price differences among them?
your company’s pricing strategy.
 If you answered “yes” to many of these questions, you are not alone. Some of
the most successful companies face the same challenges. That’s the good
news. The bad news is that your company loses money every day — money
that is left on the table when you negotiate ineffectively and money that is
sent to your competitors when customers leave because you cannot meet
their needs.

Nowhere is this loss more acutely felt than in the medical products industry.
Changes in Medicare, Medicaid and managed care have decreased reim-
bursement levels for many product categories. Long-term care and acute care
customers are experiencing severe financial difficulties that are driving them
to squeeze suppliers. Customer mergers & acquisitions, coupled with the

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widespread growth of participation in group purchasing organizations

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(GPOs), have led to fewer and larger customers with seemingly immense pur-
chasing power that can make or break a supplier.

Unfortunately, this is the unchangeable reality of the medical products mar-

ketplace. To address this problem, it is important to understand how reactive
pricing and negotiating practices cause us to lose control of our pricing, and
to learn how to implement strategies proactively that enable us to retain as
much pricing leverage as possible in this marketplace.

Flawed Approaches Predominate Today

There are two primary flaws in the way most companies price and negotiate
with customers today: Both have a significant impact on the outcome of price
negotiations, and both, if not correctly addressed, can translate to a signifi-
cant loss in the negotiation process. Companies need to avoid:

■ Negotiating prices based on what customers say

they are willing to pay, and

■ Attaching prices to the wrong things.

Negotiating Prices Based on What

Customers Say They Are Willing to Pay
This practice actually causes customers to reduce what they will pay. Experi-
enced sales people know that different customers value similar products and
services differently. Many managers respond to this reality by trying to deter-

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mine what customers will pay — either by asking them directly during a
negotiation or by using market research techniques to uncover it. This is a
problem for several reasons.

One problem is that some customers don’t know what they should be willing
to pay. Customers do not always understand the impact a product can have
on their bottom line, particularly when the product is innovative. Often sup-
pliers do not help customers understand value because they talk only about
features and benefits — for example, marketing and selling based on a unique
feature, such as a new hip replacement made of a special titanium alloy, or a
benefit, such as a special titanium alloy that is five times less likely to crack
than the old material. Still, a purchasing administrator may not understand
how the titanium alloy affects the hospital’s bottom line and why he should be
willing to pay more for it than for the old material. Even in mature product cat-
egories when the core product has become a commodity, customers do not
always understand how the extra services you provide affect their businesses.

Another problem is that even if customers do understand the value of your

products, they may be reluctant to share that information if they think it will
affect the price. Many suppliers have trained customers to negotiate on price
by lowering prices every time a customer demands
it. As a result, many customers demand a better
deal, even if they think that your first offer repre-
sents good value for the money. If they feel another
client is getting a better deal still, they will ask why
they aren’t getting it too.
Finally, allowing your sales force to use price as a
deal closer disregards their potential to sell on
value. Effective marketing and sales strategies can
change what customers are willing to pay if they
help customers see the value of your entire prod-
uct and service package. Meeting a customer’s
price demand is a sure way to book a quick sale.
But a value-based sales effort requires an invest-
ment of time. A salesperson must understand how
their customer’s business works in order to show
the customer how they can help them do business
more profitably. They also need to learn who in the
buying organization actually makes the price-value
tradeoffs. Is it really purchasing, or someone else
behind the scenes? Any salesperson measured on
achieving revenue, rather than profit goals, would
be foolish to waste time selling value when two of
three sales based on price can be closed in the
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same timeframe.
Attaching Prices to the Wrong Things
When medical product markets mature, a technol-
ogy that was once viewed as innovative becomes a
commodity. As customers begin demanding lower
product prices, claiming parity among competing
products, suppliers begin looking for innovative
ways to differentiate themselves. Attempting to
add value to customers beyond the core tech-
nology, suppliers begin offering such services as
educational programs, 24-hour repair, consulting
services, quality control assurance and testing, JIT
delivery and many others. Although this strategy
could be successful, problems arise when compa-
nies do not understand how to price these product-
service packages.
In most cases, negotiators simply include the added
services to maintain the prices of the core com-
modity product. This is usually ineffective because
not all customers have the same business model,
and as a result, they receive different amounts of
value from the same product and service package.
If you think of your product and service package as
an indivisible bundle, the customers who receive
the least value from the added services will contin-
ue to demand the commodity price. Unless your
company is willing to lose share, you resort to low-
ering price. What happens then is that other cus-
tomers learn that some paid a lower price for the
same thing, which included the commodity product
plus the availability of the services. They demand
the lower prices as well, feeling that you have
unfairly exploited them by charging them higher
prices simply because they needed the service
more than another customer did.
In addition, offering the service as a free add-on
leads customers to treat it as if it costs nothing to
offer. If you offer free emergency delivery, your cus-
tomers may decide they don’t need to plan their
orders. If you offer free training, they may hire less
experienced people and rely on you to answer all of
their questions. Even if you can get a higher price
for your core commodity, your profits will be
devoured by the growing cost of the services you
have taught customers to expect.
As soon as managers realize this phenomenon is
occurring, the business goal shifts from maintain
prices to maintain share. In many cases, suppliers
do add value to customers but rarely spend time
understanding the dollar value of these services
and activities and rarely, if ever, attach a price to
them. Usually, the services are simply “thrown in”
as part of the package for customers who pur-
chase the commodity. While this may help to
achieve your goal of maintaining share, it does so
at great cost to your company. Fortunately, there
are better ways to set prices and negotiate them
with customers.
Strategic Solutions
In order to avoid confronting the problems out-
lined above, medical product manufacturers must
understand what drives value for various cus-
tomers and use that information to develop a more
effective pricing strategy and appropriate tactics
for customer negotiations. This strategy includes:
■ Using metrics for pricing commensurate
with value received.
■ Reconfiguring product and service
packages to meet customer’s needs.
■ Communicating the value of every
aspect of the product and service
package.
Using Metrics for Pricing
Commensurate with Received Value
Determining what to price is one issue, determining
how to price is another. What you should price are
the aspects of your customer package that drive value,
whether they are products or services. Jack Welch
employed this strategy effectively at GE in the late
1980s. He transformed GE’s strategy from product cen-
tered to customer solutions centered by competing
aggressively on the core offering and adding valuable
services which customers paid for. He did this so effec-
tively, that several services were spun off into profit-
generating businesses for GE, such as GE Capital. In
business-to-business markets, with few exceptions,
customers have difficulty acknowledging the value of
things that do not have a price attached.
How products and services are priced should be driven
by how customers derive value from using them. Con-
sider the case of a pharmaceutical gas manufacturer
that was considering traditional pricing metrics for the
product at launch, that is, leasing equipment to hospi-
tals and charging them per canister of gas purchased.
After interviewing customers (hospitals) to understand
how purchase decisions were made and what drove
value, the manufacturer realized that smaller patients
consumed smaller amounts of the gas per hour of ther-
apy than larger patients did. However, the severity of
the illness and, in turn, the value of the therapy, was
unrelated to the size of the patient. Management later
decided that a much better pricing metric was minutes
of usage because the value of the gas increases or
decreases based on the amount of time that the patient
requires the therapy. A high price per canister may
have eliminated hospitals requiring only small amounts
of the gas, while a low price per canister may have left
significant amounts of money on the negotiating table
with hospitals treating patients who require more
gas. Pricing based on minutes of usage allowed
customers who receive high value to receive a
higher price and customers who receive low value
to receive a low price.
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not all of them will receive the same value from a par-
ticular service or feature. Managers, in an attempt to
solve this problem, usually offer customers a relatively
fixed package of products and services and negotiate
the price to reflect differences in value. The problem
with this strategy is that when customers learn that
they can pay different prices for the same package,
they cease making price and value tradeoffs when pur-
chasing and simply begin demanding the lowest price
for the products and services they need.
The fact that different customers derive different value
for the same package is a fact that cannot be changed.
However, a more effective solution to this problem is to
offer flexible packages with fixed prices associated with
each package. As one example, a nourishment product
manufacturer sells to hospitals in a variety of geo-
graphic locations. These products are often the only
source of food for some patients, which makes the
availability and reliability of product delivery of para-
mount importance. This is not a problem in large cities
since there are many local distributors with stock on
hand. In smaller towns and rural locations, the avail-
ability of quick emergency delivery is crucial. Ready
availability from a variety of distribution sources is so
important that, in many cases, rural customers are will-
ing to pay more to a manufacturer who can promise
delivery when needed. It is also more costly for manu-
facturers to deliver to these locations. Given the high
value to customers and the high cost for manufacturers,
it makes sense for the manufacturer to charge a lower
price for the product itself with different prices associat-
ed with different delivery options. This way, a customer

Other types of pricing metrics include per usage

fees or flat fee pricing. Since many medical product
suppliers are being pressured to participate in
risk-sharing arrangements, pay-for-performance is
an effective pricing metric in many cases. The bot-
tom line is to choose a metric that tracks with
value in order to capture a fair share of that value
you create for customers.

Reconfiguring Product and Service

Packages to Meet Customer’s Needs
Once appropriate pricing metrics are determined,
product and service packages must be configured
to meet the needs of various types of buyers. Since
customers compete differently in their markets,
who prefers a low price can receive one only if he’s will-
ing to wait for delivery. For those who value immediate
delivery, a higher price is attached (Figure 1).
This change may involve a significant cultural shift in
the way suppliers negotiate because it requires the sup-
plier to stop thinking of their product and service pack-
age as an indivisible bundle, and instead offer several
combinations of products and services. This approach
enables the right product to be offered to the right cus-
tomer at the right price. Additionally, it sends an impor-
tant message to your customers: negotiations are not
about how skillfully you negotiate. They are about mak-
ing price and value tradeoffs.
Communicating the Value of Every Aspect
of the Product and Service Package
Understanding what drives value for various customers
is a necessary first step in developing a successful com-
munication and negotiation strategy. Here, value refers
to economic value — the effect, in dollars, that your
company has on a customer’s bottom line relative to
the customer’s next-best competitive alternative. This
means understanding how your entire product and ser-
vice bundle either saves cost for a customer or drives
additional revenue. The Economic Value Estimation™
(EVE™) tool provides an effective and realistic way to
understand customer value (Figure 2).
Unfortunately, most medical product suppliers forego a
perfect opportunity to collect economic value informa-
tion concurrently during product clinical trials. Most
companies set prices and launch products as an after-
Reprinted with permission from the Spring 2000 issue of MIIR (Medical Industry Information Report).
© Nicholas Communications, Inc. 28570 Marguerite Parkway, Suite 211, Mission Viejo, CA 92692. Phone: 949-365-8021; www.miirmagazine.com
thought following regulatory approval. Once a market
has been established, making drastic changes from the
prevailing price levels in the industry can be very chal-
lenging. However, even for mature product categories,
the EVE™ tool is no less powerful or useful in communi-
cating the value of a product and service package and
slowing the further erosion of price in the industry.
EVE™ can be a powerful tool during customer negotia-
tions because it is realistic. It forces you to acknowl-
edge your advantages and disadvantages relative to
your next best competitor and to translate those differ-
ences into real dollars for customers. It also it redirects
the customer negotiation. Customers often focus solely
on how much it costs them to acquire your products
and services. Discussing economic value with them
allows you to show customers how much its costs
them NOT to do business with you. Unfortunately, it is
not enough simply to communicate value to customers,
you must convince them to pay for it. This is accom-
plished by pricing every aspect of your customer pack-
age, communicating the value of each, and forcing cus-
tomers to make tradeoffs among them in order to find
the price-value combination for them.
Strategic pricing is not simply about “getting the right
price.” It is about orchestrating the entire marketing
function to create value that can profitably be captured
in the price. Although developing a sound pricing strat-
egy is the cornerstone of profitability, it is only a first
step. Executing that strategy successfully in the field
requires that the strategy be developed in conjunction
with a realistic implementation plan. While the trends
and dynamics of the medical markets in
which you compete are unchangeable, with a
solid strategy as a foundation and the suc-
cessful tools for implementation, you can
ensure that you capture a fair share of the
value you create for your customers.
Lisa Thompson is a director at Strategic Pricing
Group, Inc. (SPG, Marlborough, Massachusetts)
where she also serves as the healthcare practice
manager. At SPG, Lisa uses her knowledge of sever-
al industries including high tech, media and adver-
tising and healthcare to meet clients’ requests. She
has extensive experience in all aspects of the
healthcare field. Lisa serves on the board of direc-
tors for the ODWIN Learning Center in Boston, a
non-profit organization that trains lower-income
adults for successful careers in the healthcare indus-
try. She holds an MBA from the F.W. Olin Graduate
School of Business at Babson College and has expe-
rience in the areas of marketing, sales, and sales
management. Contact her at 508-481-9775, ex.239,
or at lthompson@spgboston.com.
65 Boston Post Road West Marlborough, MA 01752
T: 508.481.9775 F: 508.303.2241 E: spgboston.com